Case BriefsSupreme Court

Supreme Court: The bench of Indira Banerjee* and AS Bopanna, JJ has reversed the NCLAT order wherein it was held that the Government cannot claim first charge over the property of the Corporate Debtor, as Section 48 of the Gujarat Value Added Tax, 2003 (GVAT Act), which provides for first charge on the property of a dealer in respect of any amount payable by the dealer on account of tax, interest, penalty etc. under the said GVAT Act, cannot prevail over Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Holding that NCLAT clearly erred in its observation that Section 53 of the IBC over-rides Section 48 of the GVAT Act, the Court observed that, Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman’s dues for a period of 24 months preceding the liquidation commencement date.

Going into the scheme of both the Statutes, the Court said that Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited. Such security interest could be created by operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority. Likewise, the State is a secured creditor under the GVAT Act.

On the validity of a resolution plan which does not meet the requirements of Section 30(2) of the IBC, the Court held that the same would be invalid and not binding on the Central Government, any State Government, any statutory or other authority, any financial creditor, or other creditor to whom a debt in respect of dues arising under any law for the time being in force is owed. Such a resolution plan would not bind the State when there are outstanding statutory dues of a Corporate Debtor.

Explaining the scope of Section 31 of the IBC, the Court said that if a Resolution Plan meets the requirements, the Adjudicating Authority is mandatorily required to approve the Resolution Plan under Section 31(1). On the other hand, Section 31(2), which enables the Adjudicating Authority to reject a Resolution Plan which does not conform to the requirements referred to in Section 31(1), uses the expression “may”. If the established facts and circumstances require discretion to be exercised in a particular way, discretion has to be exercised in that way. If a Resolution Plan is ex facie not in conformity with law and/or the provisions of IBC and/or the Rules and Regulations framed thereunder, the Resolution would have to be rejected.

It was, hence, held that if the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan. Consequently, the Court observed that the Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.

Hence, if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.

[State Tax Officer v. Rainbow Papers Ltd, 2022 SCC OnLine SC 1162, decided on 06.09.2022]


*Judgment by: Justice Indira Banerjee

Case BriefsSupreme Court

Supreme Court: In the Reliance Commercial takeover dispute, the 3-judges Bench comprising Dr. D Y Chandrachud*, Surya Kant and A S Bopanna, JJ., gave a green signal to the voting process to implement the resolution plan. The Court, though upheld the applicability of SEBI circular, it opined that the different voting mechanism proposed under the SEBI Circular will further delay the resolution process and potentially disrupt the efforts undertaken by the stakeholders, including the retail debenture holders. The Court noted,  

“Such unscrambling of the resolution process will not only prove time-consuming, but may also adversely affect the agreed realized gains to the retail debenture holders, who have already consented to the negotiated settlement before the High Court.” 

Factual Matrix 

The instant case relates to takeover of Reliance Commercial Finance Ltd. (RCFL) by Authum Investment and Infrastructure Ltd.; where a dispute arose with regard to the applicability of two circulars issued by RBI and SEBI— Reserve Bank of India (Prudential Framework for the Resolution of Stressed Assets) Directions 2019 and SEBI Standardisation of procedure Circular (13-10-2020).   

RCFL had issued Non-Convertible Debentures to various persons and Vistra ITCL (India) Ltd. was the Debenture Trustee under three Debenture Trust Deeds. RCFL committed its first default under the Debenture Trust Deeds in March 2019. 

The dispute 

Seventeen debenture holders instituted a suit on the Original Side of the Bombay High Court for protection of their interests with respect to the amounts due to them by RCFL, alleging that certain funds available with the Bank of Baroda, were distributed amongst creditors without regard to their status as secured or unsecured creditors without their consent and that they had a first charge on the receivables of RCFL.  

The debenture holders further alleged that the RBI Circular permitted this illegal distribution of funds and hence they urged for setting aside of the RBI Circular as illegal and ultra vires. They also sought an injunction restraining RCFL, Bank of Baroda, and RBI from implementing the RBI Circular. 

Impugned Decision  

The Single Judge held that the SEBI Circular could not be permitted to operate retrospectively and did not govern the Debenture Trust Deeds.  However, opining that a mere reference to the SEBI Circular would not override the express terms of any of the Debenture Trust Deeds, the Single Judge allowed to proceed with the voting process for the takeover of RCFL according to Debenture Trust Deeds signed in compliance with the RBI circular. In appeal, the Division Bench affirmed the aforesaid order of the Single Judge. 

Issues  

Based on the submissions canvassed by the parties, the following issues arose for determination: 

  1. Whether the civil court had the jurisdiction to entertain the lis in this case; and 
  2. Whether the debenture holders and other parties in the present case were required to follow the procedure under the SEBI Circular. 

Issue 1: Jurisdiction  

On the first issue, the Court noted that Section 15Y of the SEBI Act imposes a bar on the civil court to entertain any suit in respect of any matter that an adjudicating officer appointed under the SEBI Act is empowered to determine; however, since the Adjudicating officer has no jurisdiction under the SEBI Act to grant the relief sought by the plaintiffs in the first instance, the bar in Section 15Y would not operate as against the suit in the instant case. 

Similarly, with regard to the bar under Section 430 of the Companies Act that no civil court shall have the jurisdiction to entertain any suit in respect of any matter which the National Company Law Tribunal or the National Company Law Appellate Tribunal is empowered to determine, the Court observed that since neither the NCLT nor the NCLAT has jurisdiction to adjudicate upon a challenge to the RBI Circular, the bar in Section 430 is not attracted in the case at hand. 

Therefore, the Court held that the Single Judge as well as the Division Bench of the Bombay High Court properly exercised jurisdiction over the subject matter of the suit. 

Issue 2: Applicability of the SEBI Circular  

The RBI Circular provided that certain lenders may opt for a resolution strategy available to them under the existing legal framework, including entering into a resolution plan or initiating legal proceedings for recovery or insolvency. If the lenders chose to implement a Resolution Plan, they were required to enter into an Inter-creditor Agreement (ICA). 

By issuing the SEBI Circular, SEBI subscribed to the overall framework of the RBI Circular and permitted debenture holders to participate in the process specified in the RBI Circular to enter into a Resolution Plan (RBI circular provides only lenders can participate). Under the RBI Circular, the Resolution Plan cannot come into existence without an ICA. The SEBI Circular does not disturb this position. Hence, both the RBI Circular and the SEBI Circular refer to one and the same ICA and Resolution Plan.  

Rejecting the RCFL’s argument that Clauses 22 and 23 of the Fifth Schedule to the Debenture Trust Deed(s) are not concerned with signing an ICA or with the subject matter of the SEBI Circular in general, the Court observed that RCFL’s suggestion that the ICA and the Resolution Plan are distinct and severable is an incorrect interpretation of the circulars in question. The ICA and the Resolution Plan are inextricably intertwined and the latter has its genesis in the former and flows from it. 

Hence, the Court held that any reference to an ICA in the SEBI Circular is also necessarily a reference to the Resolution Plan and vice versa. It is not open to debenture holders to participate in the implementation of the Resolution Plan without being involved in its genesis through the ICA. The Court remarked,  

“There is only one ―door, so to speak, through which debenture holders can gain entry into the Resolution Plan with the lenders and that is through the ICA. Therefore, while the SEBI Circular does not mandate the execution of an ICA as the only route to entering a compromise with the issuer company, it lays down a procedure in the event that debenture holders choose the route of implementing a Resolution Plan with the lenders. This procedure cannot be circumvented.” 

Upholding the applicability of the SEBI circular, the Court pointed out the following: 

  • The purpose of the SEBI Circular is multi-fold – not only does it protect the interests of debenture holders at large (Clause 7), but it also protects the interests of any dissenting debenture holders (Clause 6.6).  
  • In the absence of Clause 7, debenture trustees would likely be unable to exit the ICA or the Resolution Plan even if they were not ―in the interest of investors or if the Resolution Plan was not finalized within 180 days from the end of the review period.  
  • Significantly, the absence of Clause 6.6 could mean that dissenting debenture holders would be bound by decisions taken even by way of a simple majority.  
  • We agree that the language in Regulation 15(7) of the 1993 Regulations and the SEBI Circular is facilitative and not mandatory. This is in recognition of the fact that debenture holders may opt to exercise their rights through mechanisms other than the execution of a Resolution Plan.  
  • The language cannot be construed to be facilitative in the sense of providing debenture holders with the option of by-passing the modalities prescribed by the SEBI Circular while accepting a Resolution Plan. The ICA continues to be the foundation or mother document for the Resolution Plan. 

Retroactive Application of the SEBI Circular  

Though RCFL issued the debentures and defaulted on the payments to the debenture holders prior to the issuance of the SEBI Circular, the Court culled out the following points to uphold the retroactive applicability of the SEBI Circular: 

  • On 13-10-2020 (when the SEBI Circular came into force), a compromise or agreement on the restructuring of the debt owed by RCFL did not exist. The debenture holders were not vested with any rights with respect to the resolution of RCFL‘s debt.  
  • The existence of the debt and the subsequent default by RCFL was the status of events, which existed prior to 13 October 2020. Once it came into force, the SEBI Circular applied to the manner of resolution of debt, as specified therein. 
  • Even assuming that debenture holders were vested with the right to sanction a compromise or arrangement in terms of the special majority in Clause 23 to the Fifth Schedule of the Debenture Trust Deed, they were divested of such a right upon the issuance of the SEBI Circular.  
  • Clause 59 of the Debenture Trust Deed stipulates that any provision in the Debenture Trust Deed which is in conflict with the 1993 Regulations is null and void.  
  • A contractually vested right may be taken away by the operation of a statutory instrument. The SEBI Circular owes its existence to statutory powers conferred by special legislation.  

Can SEBI Circular Bind Dissenting Debenture Holders 

SEBI contended that the compromise arrived at in terms of the direction of the High Court will also bind all the other debenture holders, who were not a party to the original suit before the High Court which will prejudice the dissenting debenture holders as they have to settle for a lesser amount – 24.96% of the principal among with a further 5% of the principal outstanding.  

Agreeing with SEBI‘s submission that the compromise arrived at the Debenture Trust Deed level among the consenting debenture holders should not bind the dissenting debenture holders, the Court directed that the dissenting debenture holders should be provided an option to accept the terms of the Resolution Plan.  

Alternatively, the Court held that the dissenting debenture holders have a right to stand outside the proposed Resolution Plan framed under the lender‘s ICA and pursue other legal means to recover their entitled dues. Hence, the Court disapproved the High Court’s interpretation of SEBI circular.  

Findings and Conclusion  

Though the Court upheld the applicability of the SEBI circular, it refrained from applying the same due to following findings:  

  • Under the present scheme of the Resolution Plan, retail debenture holders having exposure of up to INR 10 lakhs would stand to realize 100% of their principal dues. The secured retail debenture holders having an exposure of more than INR 10 lakhs would realize 29.69%. 
  • In comparison, the secured ICA lenders would receive 24.96% of their principal amount, which is lower than the recovery made by the debenture holders. It is also important to highlight that none of the debenture holders have raised any grievance with regard to the proposed compromise.  
  • The different voting mechanism proposed under the SEBI Circular will further delay the resolution process and potentially disrupt the efforts undertaken by the stakeholders, including the retail debenture holders.  
  • Such unscrambling of the resolution process will not only prove time-consuming, but may also adversely affect the agreed realized gains to the retail debenture holders, who have already consented to the negotiated settlement before the High Court. 

The Court observed,  

“In such a situation, application of the SEBI Circular, though right in law, may lead to unjust outcomes for the retail debenture holders if this court were to reverse the entire course of action which has occurred in the present case.” 

Relying on State v. Kalyan Singh, (2017) 7 SCC 444, the Court opined that the jurisdiction under Article 142 can be used to relax the rigors of law depending upon the peculiar facts and circumstances. Hence, considering that the compromise presently arrived at, which is in the interests of all the parties, will be disturbed if a new process is directed to be commenced in accordance with the SEBI Circular at the present stage, the application of the SEBI Circular will lead to a scenario where a Resolution Plan validly agreed upon by the ICA lenders under the RBI Framework will have to be unscrambled.  

Hence, the Court extended the benefit under Article 142 to the retail debenture holders by allowing the Resolution Plan to pass muster. The appeal was partly allowed and the Authum was allowed to process the takeover of RCFL.  

[SEBI v. Rajkumar Nagpal, 2022 SCC OnLine SC 1119, decided on 30-08-2022] 


*Judgment by: Justice Dr. D Y Chandrachud 


Appearance:  

For SEBI: N Venkataraman, Senior Counsel & Additional Solicitor General  

For RCFL: Darius Khambata, Senior Counsel 

For Bank of Baroda: KV Viswanathan, Senior Counsel  

For Authum Investment and Infrastructure Ltd.: Dhruv Mehta, Senior Counsel 


*Kamini Sharma, Editorial Assistant has put this report together.  


NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member), held that the implementation of the Jet Airways Resolution Plan will be subject to the outcome of appeals filed against the order of National Company Law Tribunal which approved the resolution plan for Jet Airways.

Mr Balbir Singh, ASG appearing for the applicant referred to the order of the Supreme Court dated 15-9-2021 in Civil Appeal No. 3290 of 2017 in the matter of Commissioner of Income Tax v. Jet Airways India Ltd., and Order dated 16-11-2021.

In view of the above-said orders passed by the Supreme Court, Tribunal permitted the applicant to intervene in the present appeal.

Present appeals were filed against the order dated 22-6-2021 passed by the Adjudicating Authority approving the Resolution Plan.

The effective date had been fixed as 28-5-2022 and the process of the implementation of the plan has begun.

Further, the appellant’s counsel expressed their apprehension that in the event their claim was allowed, and the plan was implemented, their claim may not be met by the Successful Resolution Applicant.

Tribunal fixed the appeals on 05th July, 2022 and made it clear that the implementation resolution plan shall abide by the result of the appeals filed.

Lastly, the Senior Advocate, Krishnendu Datta submitted that the Successful Resolution Applicant shall withhold the ‘BKC’ Property, which is a valuable property and till the next date, shall not take any steps for alienation of the said property.

Coram directed that the interim order Company Appeal (AT) Ins. No. 686 of 2021 shall continue. [Association of Aggrieved Workmen of Jet Airways (India) Ltd. v. Jet Airways (India) Ltd., 2022 SCC OnLine NCLAT 222, decided on 30-5-2022]


Advocates before the Tribunal:

For Appellant:

Mr. Siddharth Bhatnagar, Sr. Advocate with Mr. Aditya Sidhra and Mr. Swarnendu Chatterjee, Mr Yashwardhan Singh, Advocates.

For Respondents:

Mr. Arun Kathpalia, Sr. Advocate with Mr. Rohan Rajadhyaksha, Ms. Aditi Bhansali, Mr. Nishant Upadhyay, Mr. Madhur Arora, Mr. Dhiraj Kumar Totala, Ms. Trisha Sarkar and Ms. Tanya Chib, Advocates for R-1 & 3.

Ms Pooja Mahajan, Ms Mahima Singh, Advocates for SRA.

Mr. Raunak Dhillon, Ms. Isha Malik and Ms. Niharika Shukla, Advocates for R-2.

Mr. K. Datta. Sr. Advocate with Mr. Rajat Sinha, Ms. Pooja Mahajan, Ms. Mahima Singh and Ms. Aveena Shrama, Advocates for R-4.


Read more here:

NCLT | Whether Resolution Plan can be shared with Jet Airways employees or not? Verdict explains provisions revolving around confidentiality, purpose of code and more

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): Justice Ashok Bhushan (Chairperson) and Dr Ashok Kumar Mishra (Technical Member) expressed that, once Resolution Plain is approved by the Adjudicating Authority, it no longer remains a confidential document, so as to preclude Regulator and other persons from accessing the said document.

Whether the appellant/applicant is entitled to be given a copy of Resolution Plan or any part of the Resolution Plain in the appeal?

Appellant had sought a direction to produce records along with a full set of documents relating to Corporate Insolvency Resolution Process of Corporate Debtor in the application for interim relief.

Question that is to be answered in the present matter is:

Whether appellant is entitled to a copy of Resolution Plan?

Background

Appellant was an association of aggrieved workmen of the Jet Airways (India) Ltd. and were Operational Creditors who filed their claim before the Resolution Professional. The Resolution Plan allocated workmen and employees an amount of Rs 52 Crores. The said Appeal had been filed by the Appellant challenging the order of the Adjudicating Authority approving the Resolution Plan on several grounds.

Analysis, Law and Decision

In view of relevant sections and regulations, Coram expressed that an Insolvency Professional must ensure that confidentiality of the insolvency resolution process, liquidation or bankruptcy process, as the case may be, is maintained at all times. However, this shall not prevent him from disclosing any information with the consent of the relevant parties or required by law.

Section 24 of the IB Code read with Regulation 21 (3) (iii) of Process Regulation 2016, makes it clear that all Members, who were to participate in the meeting of the Committee of Creditors had to be provided copies of all relevant documents.

Therefore, in view of the above, the entitlement of copy of documents during the CIRP is for only those who are to participate in CIRP.

The category of creditors including the Members of the suspended Board of Directors or the partners of the corporate persons, who are entitled to participate in the meeting of the Committee of Creditors are entitled to receive copies of all documents.

Supreme Court in the decision of Vijay Kumar v. Standard Chartered Bank, (2019) 20 SCC 455, held that Members of the suspended Board are entitled to participate in the meeting of the Committee of Creditors. They are also entitled to be given a copy of the Resolution Plan before such meetings are held.

The question which arose in the present proceeding was: Whether the Resolution Plan after it being approved by the Adjudicating Authority, still continues to be a confidential document, so as to deny access to any of the claimants? 

Tribunal observed that when the inspection is permitted of record of the Adjudicating Authority, obviously inspection can very well be made of the Resolution Plan, which is part of the proceedings before the Adjudicating Authority.

Further, the provision of Section 61(3) reaffirms the Tribunal’s view that after approval of the Resolution Plan, Resolution Plan does not remain a confidential document, so as to deny its perusal to a claimant, who is aggrieved by the Plan and has come up on the Appeal.

Adding to the above, Coram elaborated that the Resolution Plan even though it is not a confidential document after its approval, cannot be made available to each and to anyone who has no genuine claim or interest in the process.

In the present case, the appellant is entitled to the relevant part of the Resolution Plan relating to the claim of the workmen and employees. Hence Tribunal directed that part of the Resolution Plan which deals with the claim of workmen and employees should be provided to the appellant by the successful resolution applicant. [Assn. of aggrieved Workmen of Jet Airways (India) Ltd. v. Jet Airways (India) Ltd., 2022 SCC OnLine NCLAT 36, decided on 20-1-2022]


Advocates before the Tribunal:

For Appellants:

Mr. Nikhil Nayyar, Sr. Advocate with Ms. S. Manjula Devi, Advocate

Dr. KS Ravichandran (CS)

For Respondents:

Mr. Arun Kathpalia, Sr. Advocate with Mr. Malhar Zatakia, Mr. Nishant Upadhyay, Madhur Arora, Mr. Dhiraj Kumar Totala Ms. Tanya Chib, Advocates (R-1, 3)

Ms. Isha Malik, Ms. Niharika Shukla and Mr. Raunak Dhillon, Advocates (R-2)

Ms. Pooja Mahajan, Mr. Aashish Vats, Mr. Arveera Sharma, and Ms. Mahima Singh, Advocates (R-4)

Op EdsOP. ED.

Introduction

The Supreme Court vide judgment dated 15-11-2019, deliberated upon a concatenation of significant issues in the case concerning the Committee of Creditors (CoC) of Essar Steel India Ltd. v. Satish Kumar Gupta[1] under Insolvency and Bankruptcy Code, 2016[2] (IBC). The acquisition of Essar Steel had undergone proceedings under the Code for more than two years and eventually brought clarifications on multiple questions pertaining to the insolvency regime. The article is an attempt to unravel the answer to the issue of whether approval of a resolution plan under the Code results in extinguishment of stamp duty?

Background

The debt amounting to INR 55,000 crores was overdue from Essar Steel and these mounting non-performing assets (NPA) were critically affecting the banking system operations in India. Pursuant to the process of insolvency, in December 2019, a joint venture between ArcelorMittal India (P) Ltd. (ArcelorMittal) and Nippon Steel acquired Essar Steel.

The National Company Law Tribunal (NCLT) issued an order[3] wherein insolvency proceedings were initiated against Essar Steel on the admission of an application which was filed by Standard Chartered Bank and SBI. During its initial phase, resolution plans submitted by ArcelorMittal and Numetal Ltd. (Numetal) were found to be ineligible under Section 29-A[4] of the Code by NCLT order dated 4-10-2018.[5] Section 29-A of the Code states that:

A person or any other person acting in concert joint with such person is not eligible to submit a resolution plan if the person (a) is an undischarged insolvent; (b) in accordance with the guidelines of the RBI under Banking Regulation Act, 1949[6] is a wilful defaulter; or (c) at the time of submission of the resolution plan has an account or an account of a corporate debtor under the control and management of such person or of whom such person is a promoter, classified as NPA in accordance with the guidelines of RBI issued under the Banking Regulation Act, 1949.

The commencement of proceedings before the learned adjudicating authority and Appellate Tribunal

Through an order dated 8-3-2019,[7] NCLT partially approved the resolution plan proposed by ArcelorMittal and recommended CoC to consider the segregation of funds to reduce the discrimination between the creditors and enable higher recovery for the operational creditors with claim value more than Rs 1 crore.

The impugned judgment in this particular case applied the principle of equality. It elaborated that irrespective of the creditors being unsecured or secured, operational or financial, equitable treatment must be accorded to the creditors as they are essentially a group of creditors who are situated in a similar position and based on this, there should be no differences in terms of debt to be repaid to them.

The CoC placed due emphasis on the position of Standard Chartered and stated that it was placed distinctly in terms of other secured financial creditors because of the fact that it was not a direct lender to the company and its debt was secured by the way of a pledge and not in the form of a charge in the project assets of the company. In furtherance of this, vide judgment,[8] the National Company Law Appellate Tribunal (NCLAT) approved the resolution plan of ArcelorMittal and redesigned the manner of distribution of amount so that creditors, irrespective of their group and nature were treated equally.

The Supreme Court further set aside the NCLAT order because if the distinction between the groups of creditors in terms of secured or unsecured operational and secured or unsecured financial creditors is vitiated then the bankers would be hesitant to apply for IBC for stressed assets and they would certainly look for liquidation of the companies which lies in contradistinction to the objective of the Code. The line of distinction between secured and unsecured creditors is pertinent particularly in the banking area as a majority of lending is based on collateral.

Prevalence of creditor-driven process in Indian insolvency landscape

The Code provides the entire process for the corporate insolvency resolution process (CIRP) to find a path for maintaining the viability of the business before undergoing the liquidation process in case of no revival prospects of the corporate persons. The Code mandates that the whole process of CIRP should be completed within the stipulated time of 180 days or an extended period of additional 90 days. Therefore, in total, the CIRP process should be completed anyhow within 330 days, including the period of extension time taken and in the legal proceedings. The time-bound period of CIRP is in line with the objectives enshrined under the Code.

In the process of CIRP, a resolution applicant proposes potential solutions for the revival of the corporate debtor. It is contended that CoC occupies the position of driver’s seat for directing the entire CIRP process. This presumption is driven by the fact that the financial creditors are certainly not unaware of the viability of the corporate debtor and the underlining feasibility of the resolution plan because they are engaged in the money lending business and they always do a due diligence check as a part of their homework before providing loan to the corporate debtor. Therefore, the determination of the route of the corporate resolution process is carried out through the commercial wisdom of the majority of creditors with the prospective resolution applicant.[9] The Court clarified further that the business decision depends upon the CoC; however, sufficient emphasis must be provided to the objectives enshrined in the Code.

In Karad Urban Cooperative Bank Ltd. v. Swwapnil Bhingardevay[10] the Court focused on the primordial right in the hands of resolution applicant to receive substantial and complete information pertaining to the corporate debtor as the prospective resolution applicant suddenly cannot face “undecided” claims because it would cause uncertainty for the applicant who would soon take over the business of the corporate debtor. Through all the pointers mentioned above, it is clear that the process of CIRP should be concluded in a timely fashion, and complete information regarding corporate debtor must be made available in the hands of resolution applicant with final decision making bestowed on CoC.

Stamp duty implications on resolution plan

It is important to understand the ramifications of stamp duty on the resolution plan under the Code. The NCLT via order dated 8-3-2019,[11] rejected the claim of Essar Steel[12] due to the failure to pay requisite stamp duty on the documents and for non-completion of statutory formalities which were necessitated by the Stamp Act, 1899[13]. The Supreme Court also took into consideration this particular fact and rejected the claims on the basis of failure to make payment of respective statutory stamp duty.

Placing reliance on Monnet Ispat,[14] NCLT in the insolvency resolution case rejected its plea for exemption from stamp duty provisions on the transfer of assets pursuant to the resolution plan. In this case, an issue arose wherein an order was sought by the applicant for an exemption from the payment of stamp duty in respect of actions undertaken as per the final resolution plan. The Bench answered the question negatively and stated that in respect of reconstruction and amalgamation as envisaged in the resolution plan, there being no express provision conferring powers to exempt levying stamp duty upon this Bench, an exemption cannot be granted and there is no escape of the resolution applicant from paying taxes and other governmental dues. In furtherance to this, the pivotal case of Synergies Dooray Automotive Ltd. (SDAL)[15] can also be referred. The matter of the case deals a situation wherein Synergies Dooray was placed on the foothold of insolvency proceedings. The debt owed by the corporate debtor to its financial creditors was around Rs 972.15 crores however, the repayment according to the approved insolvency plan by CoC was of the amount Rs 50 crores, consequently an appeal was filed by Edelweiss ARC before NCLAT challenging the order of NCLT that approved SDAL’s resolution plan. The resolution plan also provided for the exemption from payment of stamp duty on the transfer of assets on amalgamation. The NCLAT order deduced upon the issue of statutory dues and whether these statutory dues relating to Central or State Government or legal authority come under the umbrella term of “operational creditors”?

While answering this, the Bench viewed the term “operational debt” as a debt arising during the operation of the company as a going concern. If company remains a going concern, and operational then such statutory liabilities such as income tax payment, VAT, etc. will arise and since, there is a direct nexus between the two, such statutory dues come within the ambit of “operational dues”. The Bench ordered SDAL to pay full payment pertaining to the statutory dues in a staggered manner. In the similar vein, stamp duty is in the nature of a tax which is congruent to sales tax and the income tax collected by the government authorities therefore, it is in the nature of a statutory due. A stamp duty is an important aspect which reflects the evidentiary value of the documents in the court of law and therefore, in the case of Essar Steel[16], by rejecting the claims due to non-payment of requisite stamp duty, the Court had taken a right step.

Analysis

The skeleton of the entire CIRP is formed by a resolution professional, and the Supreme Court substantiated that the roles and responsibilities of a resolution professional entail collection, collation, and admission of claims without getting into the skin of an adjudicatory role. All the claims which are collected are then fully negotiated and decided by the CoC. Theoretically, it may be possible for a resolution professional to restrict to a non-adjudicatory function; however, the restriction seems difficult to follow in practice. Once the determination of the issue pertaining to the going concern of the corporate debtor has been placed before CoC, and it is taken into consideration by the CoC, and CoC takes a conscious decision for the resolution plan, then the adjudicating authority will have to transit to hands-off mode.

The claim of the Essar Steel was rejected by the resolution professional as there was a failure to furnish proof of making payment of requisite stamp duty pursuant to Stamp Act on behalf of the Essar Steel despite repeated reminders to them. Though the proposition is not clear enough on the issue concerning treatment of pending stamp duty on approval of resolution plan, however the stamp duty being in the nature of income tax, and VAT should be considered in line as a statutory due.

The NCLT vide order dated 8-3-2019[17] rejected the subsequent restoration of the application, which was filed by the Essar Steel on the basis of dual grounds claiming that at the belated stage, the application should not be considered and there is no merit in the claim on the failure to produce duly stamped agreements. For the working of the Bankruptcy Code, speed is of the essence and can be attributed to two reasons. Firstly, the claim period is the time where the organisation is afloat without the clarity of control and ownership and hence, during this period no significant decisions are taken. In addition, the liquidation value has the propensity to go down in a situation wherein assets suffer from high economic rate of depreciation. From the creditor’s perspective, good realisation can be carved out provided the firm is sold as a going concern. In the cases of liquidation, delay causes value destruction.[18] Therefore, the stand taken by the Supreme Court is sustainable because the entire objective of the Code rests on the premise of timely resolution for the revival of the company and belated claims made at the final hour should not be entertained because it goes contrary to the objective of the IBC.

Conclusion

Various beneficial outcomes stemmed from the pronouncement of Essar Steel case.[19] The most significant outcome is that the objectives of IBC were unequivocally reaffirmed. The judicial pronouncement also conveyed a clear message to the promoters of the defaulting companies that they could no longer take defaults lightly and there was a real threat and possibility of them losing their companies. The treatment of stamp duty was appreciable in the instant case because the claim was made on a belated stage and entertaining such issue lately despite reminders provided does not justify the act of considering the issue and secondly, the levying of stamp duty being a State subject is also revenue for the government exchequer. There being no express provision to non-application of stamp duty, the courts cannot and should not go beyond the letters of law. This essentially facilitates the establishment of the principles of the Code and deepen its roots.


Principal Associate at Saraf & Partners, New Delhi.

†† Student, National Law University, Nagpur.

[1] (2020) 8 SCC 531.

[2] <http://www.scconline.com/DocumentLink/86F742km>.

[3] Standard Chartered Bank v. Essar Steel India Ltd., 2017 SCC OnLine NCLT 10751.

[4] Section 29-A, Insolvency and Bankruptcy Code, 2016

[5] Arcelormittal India (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1.

[6] The Banking Regulation Act, 1949.

[7] Resolution Professional for Essar Steel India Ltd., In re,  2019 SCC OnLine NCLT 750.

[8] Standard Chartered Bank v. Satish Kumar Gupta, 2019 SCC OnLine NCLAT 388.

[9] K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150

[10] (2020) 9 SCC 729

[11] Resolution Professional for Essar Steel India Ltd., In re,  2019 SCC OnLine NCLT 750.

[12] 2017 SCC OnLine NCLT 10751.

[13] The Stamp Act, 1899

[14] SBI v. Monnet Ispat & Energy Ltd., 2018 SCC OnLine NCLT 23789

[15] Director General of Income Tax v. SDAL, 2019 SCC OnLine NCLAT 691

[16] Resolution Professional for Essar Steel India Ltd., In re,  2019 SCC OnLine NCLT 750.

[17] Resolution Professional for Essar Steel India Ltd., In re,  2019 SCC OnLine NCLT 750.

[18] Institute for Policy Research Studies, Report Summary: The Financial Sector Legislative Reforms Commission, 2013.

[19] (2020) 8 SCC 531.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Coram of Justice Jarat Kumar Jain, Judicial Member and Ashok Kumar Mishra, Technical Member, dismissed an appeal on no finding any infirmity in the impugned order. However, requested the adjudicating authority to consider the application before approving any Resolution Plan.

In the instant matter an impugned order of the National Company Law Tribunal, Guwahati was challenged on the ground that the Resolution Plan was accepted by 91.84% of the members of the ‘Committee of Creditors’ (CoC) but the approval for the same is pending before the Adjudicating Authority.

The Adjudicating Authority was of the opinion,

“…we are of the considered view that the Suspended Management of the Corporate Debtor (CD) be given a chance to submit Resolution Plan as prayed for. And go by the set precedents the pleadings of the Suspended Management to give him a chance for submitting a Resolution Plan, after the final judgment, being as an MSME Unit is reasonable”.

The Adjudicating Authority had also raised an issue of how the ‘Financial Creditor’ claimed 43 times of the amount of loan disbursed 21 years back when the Financial Creditor was under RBI Regulations, and the issue that the guarantee was invoked by the original lenders – IBBI for an amount of Rs.5,42,94,868, which was 24 times of the claimed amount in 18 years.

While referring to the judgments cited by the Appellants, the Tribunal stated that the applicability of the same was under dark as the Adjudicating Authority had only permitted for giving an opportunity to MSME to submit a concrete, composite, feasible and a viable resolution plan, and no other one was allowed to submit any plan other than the Resolution plan already submitted by the Resolution Applicant.

The Tribunal further noted,

“…there is no harm in giving an opportunity to the MSME in accordance with the provisions of the Code for keeping the promotion of entrepreneurship alive. The Adjudicating Authority has only provided an opportunity to the MSME and has given the liberty to the CoC to negotiate with existing Resolution Applicant and MSME unit also and accept the one which is commercially viable and technically feasible”.

On not finding any infirmity in the order, the Appellate Tribunal dismissed the appeal[PLBB Products Pvt. Ltd. v. Piyush Periwal, Company Appeal (AT) (Insolvency) No. 160 of 2021, decided on 07-09-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


For the Appellant :

Mr Abhijeet Sinha, Mr Lzafeer Ahmad BF and Mr Aditya Shukla, Advocates.

For the Respondents :

Mr Jishnu Saha, Sr. Advocate with Mr Abhijit Sarkar, Advocates for Respondent No. 1.

Mr Sidhartha Barua and Mr Praful Jindal, Advocates for Respondent No. 2.

Mr Anand Verma and Mr Abhishek Prasad, Advocates for Respondent No. 3.

Op EdsOP. ED.

The Calcutta High Court (HC) in Sirpur Paper Mills Ltd. v. IK Merchants (P) Ltd.1 recently ruled a crucial judgment in which it determined the fate of an arbitral award after the approval of a resolution plan. The court followed the path of fresh slate theory and held that the award claim which was not filed during the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP) is extinguished as the resolution plan is approved. This post analyses Sirpur Paper Mills case2 while supporting the reasoning given by the court.

Factual matrix and issues of the case

The present case arose from a petition under Section 343 of the Arbitration and Conciliation Act, 1996 (ACA) to set aside an award passed by a sole arbitrator. Meanwhile, during the pendency of Section 34 petition, the CIRP of the petitioner (Sirpur Mills) was initiated by its other operational creditors and soon after the resolution plan of Sirpur Mills4 was approved by the adjudicating authority (AA), it filed an additional application contending that the present petition under Section 34 is to be rendered infructuous and dismissed as the resolution plan for corporate debtor (CD) is already passed. It is to be noted that the respondent (IK Merchants) did not lodge its claim concerning the award before the resolution professional (RP).  Resultantly, the question of the status of this award after approval of the resolution plan by the AA.

The two issues raised in this case were: firstly, whether the award claim is extinguished after the approval of the resolution plan or not; secondly, whether the Section 34 petition has become infructuous after the resolution plan is passed or not.

Contentions of the parties

Sirpur Mills5 contended that: firstly, as per Section 316 of the Insolvency and Bankruptcy Code, 2016 (IBC), a resolution plan is binding on all the stakeholders involved. Therefore, the claim of IK Merchants7 should not be entertained after approval of the same. If a creditor fails to submit his claim in accordance with Section 15(1)(c)8 of the IBC and Regulation 6(2)(c) of the CIRP Regulations9 he forfeits his right of payment. Secondly, the 2015 Amendment to Section 3610 of the ACA did away with the provision of the automatic stay of an award when Section 34 petition is filed. This development has been held to be applied retrospectively in the BCCI v. Kochi Cricket (P) Ltd.11 Therefore, IK Merchants12 were not restrained due to the automatic stay for filing a claim during CIRP.

While IK Merchants13 contended that default could be said to occur only when it becomes due and payable14 and the award was automatically stayed at the moment when Section 34 petition was filed in the court. Hence, the filing of a claim in NCLT could not be done by them due to this automatic stay.

Judgment of Calcutta High Court

In a nutshell, Justice Maushami Bhattacharya declared the petition infructuous rendering its dismissal. Majorly relying upon Essar Steel judgment15, the Court held that the award-holder’s claim is extinguished after the approval of the resolution plan.

Essar Steel case

In Essar Steel case16, the two-Judge Bench while deciding the fate of personal guarantors’ right of subrogation after the approval of resolution plan, observed that the approval of a resolution plan binds all the stakeholders. It states that: a successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. The Court emphasised on the need of certainties and to bring clarity to ascertain the exact amount payable by the future owner of a business. He must start running the business on a “fresh slate”.

Provisions of IBC

The Calcutta HC also relied upon the provisions of IBC, namely, Sections 2517, 2918, 3019, and 31 to infer the fate of undecided or pending claims such as the one of the respondents before this Court. At the time of making a resolution plan, the applicant relies on an information memorandum containing relevant information. The collective reading of the judgments of Essar20 and Ghanashyam Mishra and Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.21 makes it quite evident that only the claims which are featured in the information memorandum can be considered by RP and further by the resolution applicant. This information memorandum is relied upon by the resolution applicant to decide its future endeavours concerning CD.

The court stated that the operational creditor was given notice of initiation of the CIRP against the CD at various stages. The purpose of the provision of these notices under the insolvency regime is not only to make all the creditors aware of the ongoing CIRP but also to invite their claims for the preparation of a list of claims by the RP. The court held that IK Merchants22, in this case, had ample opportunity to approach the NCLT for suitable relief.

Automatic stay

Regarding the argument of the automatic stay, the Court relied on the BCCI judgment23 wherein the Supreme Court observed that for the enforcement of an award under Section 36, the amended provisions would be applicable retrospectively to those proceedings for claims as well, which were commenced before the arrival of the Amendment Act. The IK Merchants24 was under a false impression that the provisions of Section 34 of the ACA prior to the amendment would be applicable to his claim. However, the Court was of the opinion that the amended Section 36 requires the award debtor to make a separate application to get a stay on the award, departing from the earlier provision of the automatic stay on the application of the award. Therefore, an award under Section 34 is enforceable unless it is stayed by a court order by an application made under Section 36(3).

Case analysis

The first question that may come up while reading the case is whether the Calcutta HC was right to consider the award as a claim. Courts in earlier cases25 have considered an award as a valid claim under IBC. Even the unenforced foreign awards have also been considered as a claim under IBC. Also, it is clear from the definition of a claim under Section 326 of the IBC that it aims to include all the possible claims which could affect the financial condition of a CD. Although the claim was valid even in this case also, its non-filing to the RP at the right time i.e. during CIRP, resulted in its extinguishment. The rationale behind this was that no new management should have to deal with the claims from before CIRP especially when the whole systematic process has been followed under IBC to get the corporate debtor on its feet again.

A question could also pop up about the status of an award as a pre-existing dispute. A Section 34 petition made the award claim disputed which takes it outside the purview of IBC.27 But it is to be noted that the cases, which state that the pre-existing dispute is to be outside the purview of IBC, were related to the “initiation” of CIRP by the operational creditor, and not the “filing” of claim after CIRP is started. In this case, the issue was not concerning an operational creditor’s ability to initiate the CIRP due to a pre-existing dispute. Rather, the question was with respect to the need for filing a claim by the award holder. Therefore, although the award holder could not have initiated the CIRP of the corporate debtor due to the claim being disputed, he could have filed the claim when the CIRP was initiated by other operational creditors.

It is clear from the facts of the case that IK Merchants28 had time to submit the claim, as per Regulation 12(2), within 90 days from the insolvency commencement date. But the time-limit to submit the claim is directory in nature rather than being a compulsion.29 Therefore, even after the BCCI judgment30 which established the applicability of amended provisions of the ACA, IK Merchants31 had enough time of around two months in their hands to submit their claim.

Conclusion

The authors opine that for India to become an investor-friendly country, its insolvency regime must stay robust while giving due regard to creditors’ rights of payment. Keeping the objective of IBC in mind, the Calcutta HC in the present case rightly followed the fresh slate theory which goes in favour of resolution applicants. This certainty in law will go a long way in solving issues of extinguishment of claim particularly after passing of resolution plan. IBC being a special legislation should get a priority over general legislations such as ACA, in the present case.  The approach of Calcutta HC shows strict compliance of procedural aspects of IBC, which is crucial in keeping the IBC strong and effective, unlike its predecessors.


4th year student, BA LLB (Hons.), Hidayatullah National Law University, Raipur.

†† 4th year student, BA LLB (Hons.), Hidayatullah National Law University, Raipur.

1 2021 SCC OnLine Cal 1601

2 2021 SCC OnLine Cal 1601

3 <http://www.scconline.com/DocumentLink/teuo89l3>.

4 2021 SCC OnLine Cal 1601

5 2021 SCC OnLine Cal 1601

6 <http://www.scconline.com/DocumentLink/gvPKCciX>.

7 2021 SCC OnLine Cal 1601

8 <http://www.scconline.com/DocumentLink/DOWNB8ex>.

9 Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, available at <https://ibbi.gov.in/uploads/legalframwork/da571b238fd759552d3782100f410323.pdf>, last accessed on 22-5-2021.

10The Arbitration and Conciliation (Amendment) Act, 2015, available at <http://www.scconline.com/DocumentLink/9ajA4z9b>, last accessed on 22-5-2021.

11 (2018) 6 SCC 287

12 2021 SCC OnLine Cal 1601

13 2021 SCC OnLine Cal 1601

14 Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17

15 Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531

16 (2020) 8 SCC 531

17 <http://www.scconline.com/DocumentLink/42lD46RO>.

18 <http://www.scconline.com/DocumentLink/PlJRsynl>.

19 <http://www.scconline.com/DocumentLink/zB7sr53j>.

20 (2020) 8 SCC 531

21 2021 SCC Online SC 313

22 2021 SCC OnLine Cal 1601

23 (2018) 6 SCC 287

24 2021 SCC OnLine Cal 1601

25 Annapurna Infrastructure (P) Ltd. v. Soril Infra Resources Ltd., 2017 SCC OnLine NCLT 82

26 <http://www.scconline.com/DocumentLink/rOllWgj8>.

27 Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353

28 2021 SCC OnLine Cal 1601

29 Edelweiss Asset Reconstruction Co. Ltd. v. Sachet Infrastructure (P) Ltd., 2019 SCC OnLine NCLAT 592

30 (2018) 6 SCC 287

31 2021 SCC OnLine Cal 1601

Case BriefsSupreme Court

Supreme Court: The Division Bench of Dr Dhananjaya Y Chandrachud and M R Shah, JJ., observed that,

Jurisdiction of the Adjudicating Authority and the Appellate Authority cannot extend into entering upon merits of a business decision made by a requisite majority of the CoC in its commercial wisdom.

Under the Indian Insolvency regime, it appears that a conscious choice has been made by the legislature to not confer any independent equity-based jurisdiction on the Adjudicating Authority other than the statutory requirements laid down under Section 30 (2) of the IBC.

The Appeal

 Present appeal arose under Section 62 of the Insolvency and Bankruptcy Code against the decision of the National Company Law Appellate Tribunal. Reliance Infratel Limited (RIL) was the corporate debtor and appellants the operational creditors.

NCLAT had upheld the decision of NCLT wherein it had approved the resolution plan formulated in the course of the insolvency resolution process of the Corporate Debtor.

Analysis, Law and Decision

Valuation of Preference Shares

The first aspect was in relation to the inclusion of realisable value from sale of preference shares held by Reliance Bhutan Limited, in Reliance Realty Limited, in determining the liquidation value of the Corporate Debtor. Earlier, it was clarified that under IBC and its regulations, the RP appointed two registered valuers to carry out the valuation of the Corporate Debtor and to determine the liquidation value and fair value.

Appellants submission that the realizable value from the preference shares was excluded from the liquidation value of the Corporate Debtor had been rebutted by a specific clarification contained in the Monitoring Committee’s affidavit.

Further, it was added that the realisable value for the Corporate Debtor on account of any proceeds realised from the preference shares held by its subsidiary (Reliance Bhutan Limited), is included in the determination of the liquidation value of the Corporate Debtor.

Hence, value of preference shares not being included in calculating the liquidation value of Corporate Debtor was factually incorrect.

Liquidation Value – To remain nil?

On this aspect, it had been clarified that the liquidation value due to the unsecured operational creditors would remain nil in all scenarios, including if the corpus of Rs 800 crores was separately considered.

Further, it was added that even if the liquidation value of the realizable value of preference shares were to be considered in isolation for distribution amongst all the operational creditors, in terms of the priority contained in Section 53 (1) of the Code, the liquidation value due to the appellants would still remain at nil.

Impact of Exclusion 

Order of NCLT in Doha Bank proceedings

It was stated that, the exclusion of certain financial debts and hence, the exclusion of certain financial creditors from the CoC, pursuant to the order of the NCLT in the Doha Bank proceedings, has no practical implication since the resolution plan continues to be approved with a 100 per cent majority even after their exclusion.

Jurisdiction to approve a Resolution Plan 

NCLT is within its jurisdiction in approving a resolution plan which accords with the IBC, there is no equity-based jurisdiction with the NCLT, under the provisions of the IBC.

Adding to the above, it was expressed that the jurisdiction which had been conferred upon the Adjudicating Authority in regard to the approval of a resolution plan was statutorily structured by Section 31 (1).

The jurisdiction is limited to determining whether the requirements which are specified in Section 30 (2) have been fulfilled. This is a jurisdiction which is statutorily defined, recognised and conferred, and hence cannot be equated with jurisdiction in equity, that operates independently of the provisions of the statute.

Ambit of the Adjudicating Authority is to determine whether the amount that is payable to the operational creditors under the resolution plan is consistent with the norms provided stipulated in clause (b) of sub-clause (2) of Section 30.

Hence, the statute indicated that once the requirements of Section 30(2)(b) are fulfilled, the distribution in accordance with its provisions is to be treated as fair and equitable to the operational creditors.

Appellants challenged the treatments of operational creditors on the ground that it had not been fair and equitable.

It was added that as long as the payment under the resolution plan is fair and equitable amongst the operational creditors as a class, it satisfies the requirements of Section 30(2)(b).

Nature of the jurisdiction exercised by the Adjudicating Authority, while approving a resolution plan under Section 31, had been interpreted in the decision of a 2-Judge Bench in K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150.

Elaborating the above discussion, Supreme Court stated that the submission that there had been a failure to maximise the value of the assets was not substantiated by any concrete material before the Court, apart from the reference to the preference shares which had already been clarified earlier in this judgment.

It must be borne in mind that the jurisdiction of the Adjudicating Authority is circumscribed by the terms of the provisions conferring the jurisdiction.

 “…jurisdiction of the Adjudicating Authority and the Appellate Authority cannot extend into entering upon the merits of a business decision made by a requisite majority of the CoC in its commercial wisdom. Nor is there a residual equity-based jurisdiction in the Adjudicating Authority or the Appellate Authority to interfere in this decision, so long as it is otherwise in conformity with the provisions of the IBC and the Regulations under the enactment.”

 In Court’s opinion, IBC is a complete code in itself.

IBC defines what is fair and equitable treatment by constituting a comprehensive framework within which the actors partake in the insolvency process. The process envisaged by the IBC is a direct representation of certain economic goals of the Indian economy. 

Therefore, once the requirements of the IBC have been fulfilled, the Adjudicating Authority and the Appellate Authority are duty bound to abide by the discipline of the statutory provisions.

“…neither the Adjudicating Authority nor the Appellate Authority have an unchartered jurisdiction in equity.”

Conclusion

 In the present matter, the resolution plan had been duly approved by a requisite majority of the CoC in conformity with Section 30(4).

  • Whether or not some of the financial creditors were required to be excluded from the CoC is of no consequence, once the plan is approved by a 100 per cent voting share of the CoC.
  • Jurisdiction of the Adjudicating Authority was confined by the provisions of Section 31(1) to determining whether the requirements of Section 30(2) have been fulfilled in the plan as approved by the CoC. once the requirements of the statute have been duly fulfilled, the decisions of the Adjudicating Authority and the Appellate Authority are in conformity with law.

In view of the above discussion, appeal was dismissed. [Pratap Technocrats (P) Ltd. v. Monitoring Committee of Reliance Infratel Ltd.,  2021 SCC OnLine SC 569, decided on 10-08-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): Coram of Bansi Lal Bhatt, J. (Acting Chairperson), Anant Bijay Singh, J. (Judicial Member), Dr Ashok Kumar Mishra (Technical Member) while dismissing an appeal imposed costs to the tune of Rs.1 Lakh on the Appellant on finding it to be yet another effort to wriggle out of its obligations and seek withdrawal of Resolution Plan in a different garb.

In the relevant matter Union Bank of India filed an Application under Section 7 of Insolvency and Bankruptcy Code, 2016 (I&B Code) before Adjudicating Authority for initiating the Corporate Insolvency Resolution Process ( ‘CIRP’) against the Corporate Debtor – Amtek Auto Limited (‘CD’ or ‘AAL’) and subsequently CIRP commenced. Respondent No.1 came to be appointed as Interim Resolution Professional (IRP). The appellant urged that the Adjudicating Authority while approving the Resolution Plan cannot re-write the same nor can it waive any condition of the Resolution Plan, that too without the express consent of the Appellant. And the burden has been placed on the Appellant to invest huge sums to furnish the balance Performance Bank Guarantee (PBG) of Rs 150 crores.  And that there were certain preconditions that were not adhered to. The appellant contended that the execution of the long term lease was a condition precedent and the integral part of the Resolution Plan and the business of the Corporate Debtor as a going concern is dependent on the availability of this leased land as admitted by Respondents 1 and 2

Respondent vehemently denied it on the ground that the Committee of creditors and the Appellant had mutually agreed for inclusion of execution of long term lease as a condition precedent to the implementation of the approved Resolution Plan after due consideration to the land. However, it was submitted that this condition was not a condition precedent to the approval and acceptance of the Resolution Plan. Further contended that the objections raised were with ulterior objective to wriggle out from an otherwise binding Resolution Plan. Further, the Resolution Plan clearly provided that the implementation of Resolution Plan shall commence from the date of approval by AA and Letter of Intent was not a condition precedent to file the Application for approval of the Resolution Plan and was subject to directions of Supreme Court.

The Tribunal after going through the oral and written submissions, declined to accept impleadment and intervention sought by Vistra and Kotak Mahindra respectively. It was of the opinion that, “The tone and tenor of this order leaves no scope for the Appellant to resile from and wriggle out of the implication of the offer made by him, i.e. the Resolution Plan, which has been approved in terms of the order impugned in this Appeal. It is therefore manifest that the Appellant would not be permitted to backtrack and seek exit from its Resolution Plan on any pretext whatsoever…”. Further held, “…It would therefore emerge that the said condition of including execution of long term lease of 20 years with respect to Ace Complex Land on Acceptable Terms was a condition precedent to the implementation of the approved Resolution Plan and not to the approval of the Resolution Plan. “…The Respondents have been able to demonstrate that the Appellant has breached the Resolution Plan by not submitting PBG in respect of balance amount of Rs.150 crore prior to submission of Resolution Plan before the Adjudicating Authority…”.

Therefore, the Coram dismissed the appeal imposing costs of Rs 1 Lakh on the Appellant on finding it to be frivolous and devoid of merit.[Deccan Value Investors L.P, In re, 2021 SCC OnLine NCLAT 143, decided on 16-04-2021]


Advocates for Appellant

Vikram Nankani, Sr. Advocate with Dinesh Pednekar, Chanakya Keswani, Kumar Anurag Singh, Anando Mukherjee and Arpan Behl.
Advocates for Respondent

Sumant Batra, Sanjay Bhatt and Niharika Sharma, Advocates for R-1 (RP).

Tushar Mehta, SGI, Abhinav Vasisht, Sr. Advocate with Misha, Anoop Rawat, Siddhant Kant, Charu Bansal and Prabh Simran Kaur, Advocates for R2 (CoC).

Sumesh Dhawan, Advocate for R-4.

Sudhir K Makkar, Sr. Advocate with Anindita Roychowdhury, Vatsala Rai, Saumya Gupta, Bharat Makkar and Yogita Rathore, Advocates for Vistra ITCL (India) Ltd.

Arun Kathpalia, Sr. Advocate with Kaushik Moitra, Shreya Sircar, Ishita Jain, Anurag Tandon, Sanjukta Roy, Advocates for Kotak Mahindra Bank (Intervenor).

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman, BR Gavai* and Hrishikesh Roy, JJ has held that any creditor including the Central Government, State Government or any local authority is bound by the Resolution Plan once it is approved by an adjudicating authority under sub­-section (1) of Section 31 of the Insolvency and Bankruptcy Code, 2016.

Resolution Plan – When becomes binding?

After taking note of Section 31 of IBC, the Court observed that once the resolution plan is approved by the Adjudicating Authority, after it is satisfied, that the resolution plan as approved by CoC meets the requirements as referred to in sub-section (2) of Section 30, it shall be binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stakeholders.

“Such a provision is necessitated since one of the dominant purposes of the I&B Code is, revival of the Corporate Debtor and to make it a running concern.”

The Court explained one of the principal objects of IBC is, providing for revival of the Corporate Debtor and to make it a going concern. Here’s the scheme of the Code:

  • Upon admission of petition under Section 7, there are various important duties and functions entrusted to RP and CoC. RP is required to issue a publication inviting claims from all the stakeholders. He is required to collate the said information and submit necessary details in the information memorandum.
  • The resolution applicants submit their plans on the basis of the details provided in the information memorandum.
  • The resolution plans undergo deep scrutiny by RP as well as CoC. In the negotiations that may be held between CoC and the resolution applicant, various modifications may be made so as to ensure, that while paying part of the dues of financial creditors as well as operational creditors and other stakeholders, the Corporate Debtor is revived and is made an on-going concern.
  • After CoC approves the plan, the Adjudicating Authority is required to arrive at a subjective satisfaction, that the plan conforms to the requirements as are provided in sub-section (2) of Section 30 of the IBC. Only thereafter, the Adjudicating Authority can grant its approval to the plan.
  • It is at this stage, that the plan becomes binding on Corporate Debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution Plan.

“The legislative intent behind this is, to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that is permitted, the very calculations on the basis of which the resolution applicant submits its plans, would go haywire and the plan would be unworkable.”

2019 Amendment – Nature and effect of  

After the 2019 amendment, any debt in respect of the payment of dues arising under any law for the time being in force including the ones owed to the Central Government, any State Government or any local authority, which does not form a part of the approved resolution plan, shall stand extinguished.

The mischief, which was noticed prior to amendment of Section 31 of IBC was, that though the legislative intent was to extinguish all such debts owed to the Central Government, any State Government or any local authority, including the tax authorities once an approval was granted to the resolution plan by NCLT; on account of there being some ambiguity the State/Central Government authorities continued with the proceedings in respect of the debts owed to them.

In order to remedy the said mischief, the legislature thought it appropriate to clarify the position, that once such a resolution plan was approved by the Adjudicating Authority, all such claims/dues owed to the State/Central Government or any local authority including tax authorities, which were not part of the resolution plan shall stand extinguished.

Further, the word “other stakeholders” would squarely cover the Central Government, any State Government or any local authorities. The legislature, noticing that on account of obvious omission, certain tax authorities were not abiding by the mandate of IBC and continuing with the proceedings, has brought out the 2019 amendment so as to cure the said mischief.

Therefore, the 2019 amendment is declaratory and clarificatory in nature and   therefore retrospective in operation.

“Creditor” and “Other Stakeholders” – If includes Central Government, State Governments or local authorities

“Creditor” – If covers Government

“Creditor” has been defined to mean ‘any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder’.

“Operational creditor” has been defined to mean a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

“Operational debt” has been defined to mean a claim in respect of the provision of goods or   services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority

Harmonious construction of subsection (10) of Section 3 of the IBC read with subsections (20) and (21) of Section 5 thereof would reveal, that even a claim in respect of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority would come within the ambit of ‘operational debt’.

The Central Government, any State Government or any local authority to whom an operational debt is owed would come within the ambit of ‘operational creditor’ as defined under sub¬section (20) of Section 5 of the IBC.  Consequently, a person to whom a debt is owed would be covered by the definition of ‘creditor’ as defined under sub-section (10) of Section 3 of the IBC.

“As such, even without the 2019 amendment, the Central Government, any State Government or any local authority to whom a debt is owed, including the statutory dues, would be covered by the term ‘creditor’ and in any case, by the term ‘other stakeholders’ as provided in subsection (1) of Section 31 of the IBC.”

Key findings

(i) Once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of   Section 31 of Insolvency and Bankruptcy Code, 2016, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders.

Further, on the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;

(ii) 2019 amendment to Section 31 of the IBC is clarificatory and declaratory in nature and therefore will be effective from the date on which IBC has come into effect;

(iii) Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.

[Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Limited, 2021 SCC OnLine SC 313, decided on 13.04.2021]


*Judgment by Justice BR Gavai

Know Thy Judge| Justice B.R. Gavai

For Appellants: Senior Advocates Dr. A.M. Singhvi, Neeraj Kishan Kaul

For respondents: Senior Advocate Gurukrishna Kumar, Advocate Prashant Bhushan

For State Authorities: Advocate V. Shekhar

 

 

Case BriefsSupreme Court

Supreme Court: The bench of Dr. DY Chandrachud* and MR Shah, JJ has held that a person who is ineligible under Section 29A of the Insolvency Bankruptcy Code, 2016 (IBC) to submit a resolution plan, is also barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013.

“Section 29A has been construed to be a crucial link in ensuring that the objects of the IBC are not defeated by allowing “ineligible persons”, including but not confined to those in the management who have run the company aground, to return in the new avatar of resolution applicants.”

IBC liquidation and Section 230 scheme: Legislative history

Explaining the legislative history behind the scheme of compromise or arrangement proposed under Section 230, the Court noticed that there is no reference in the body of the IBC this scheme, Sub-section (1) of Section 230 was however amended with effect from 15 November 2016 so as to allow for a scheme of compromise or arrangement being proposed on the application of a liquidator who has been appointed under the provisions of the IBC.

“While there is no direct recognition of the provisions of Section 230 of the Act of 2013 in the IBC, a decision was rendered by the NCLAT on 27 February 2019 in Y Shivram Prasad v. S Dhanapal, 2019 SCC OnLine NCLAT 172. NCLAT in the course of its decision observed that during the liquidation process the steps which are required to be taken by the liquidator include a compromise or arrangement in terms of Section 230 of the Act of 2013, so as to ensure the revival and continuance of the corporate debtor by protecting it from its management and from “a death by liquidation”. The decision by NCLAT took note of the fact that while passing the order under Section 230, the Adjudicating Authority would perform a dual role: one as the Adjudicating Authority in the matter of liquidation under the IBC and the other as a Tribunal for passing an order under Section 230 of the Act of 2013. Following the decision of NCLAT, an amendment was made on 25 July 2019 to the Liquidation Process Regulations by the IBBI so as to refer to the process envisaged under Section 230 of the Act of 2013.”

The three modes in which a revival is contemplated under the provisions of the IBC

The first mode of revival is in the form of the CIRP elucidated in the provisions of Chapter II of the IBC.

The second mode is where the corporate debtor or its business is sold as a going concern within the purview of clauses (e) and (f) of Regulation 32.

The third mode is when a revival is contemplated through the modalities provided in Section 230 of the Act of 2013.

Scope of Section 230 of the Companies Act, 2013

Section 230 of the Act of 2013 is wider in its ambit in the sense that it is not confined only to a company in liquidation or to corporate debtor which is being wound up under Chapter III of the IBC. Obviously, therefore, the rigors of the IBC will not apply to proceedings under Section 230 of the Act of 2013 where the scheme of compromise or arrangement proposed is in relation to an entity which is not the subject of a proceeding under the IBC. But, when the process of invoking the provisions of Section 230 of the Act of 2013 traces its origin or, as it may be described, the trigger to the liquidation proceedings which have been initiated under the IBC, it becomes necessary to read both sets of provisions in harmony.

“A harmonious construction between the two statutes would ensure that while on the one hand a scheme of compromise or arrangement under Section 230 is being pursued, this takes place in a manner which is consistent with the underlying principles of the IBC because the scheme is proposed in respect of an entity which is undergoing liquidation under Chapter III of the IBC.”

Effect of linkage of IBC with Section 230 of the Act of 2013

In the case of a company which is undergoing liquidation pursuant to the provisions of Chapter III of the IBC, a scheme of compromise or arrangement proposed under Section 230 is a facet of the liquidation process. The object of the scheme of compromise or arrangement is to revive the company. Liquidation of the company under the IBC is a matter of last resort.

The statutory scheme underlying the IBC and the legislative history of its linkage with Section 230 of the Act of 2013, in the context of a company which is in liquidation, has the following important consequences:

  • a liquidation under Chapter III of the IBC follows upon the entire gamut of proceedings contemplated under that statute.
  • one of the modes of revival in the course of the liquidation process is envisaged in the enabling provisions of Section 230 of the Act of 2013, to which recourse can be taken by the liquidator appointed under Section 34 of the IBC.
  • the statutorily contemplated activities of the liquidator do not cease while inviting a scheme of compromise or arrangement under Section 230.

In taking recourse to the provisions of Section 230 of the Act of 2013, the liquidator appointed under the IBC is, above all, to attempt a revival of the corporate debtor so as to save it from the prospect of a corporate death.

“The consequence of the approval of the scheme of revival or compromise, and its sanction thereafter by the Tribunal under Sub-section (6), is that the scheme attains a binding character upon stakeholders including the liquidator who has been appointed under the IBC.”

Why the back-door entry of ineligible persons is banned?

“As such, the company has to be protected from its management and a corporate death. It would lead to a manifest absurdity if the very persons who are ineligible for submitting a resolution plan, participating in the sale of assets of the company in liquidation or participating in the sale of the corporate debtor as a ‘going concern’, are somehow permitted to propose a compromise or arrangement under Section 230 of the Act of 2013.”

Section 29A was designed to prevent a back-door entry to a class of persons considered to be ineligible to participate in the resolution process. Section 35(1)(f) extends the ineligibility where the liquidator is conducting a sale of the assets of the corporate debtor in liquidation.

In the context of the statutory linkage provided by the provisions of Section 230 of the Act of 2013 with Chapter III of the IBC, where a scheme is proposed of a company which is in liquidation under the IBC, it would be far-fetched to hold that the ineligibilities which attach under Section 35(1)(f) read with Section 29A would not apply when Section 230 is sought to be invoked. Such an interpretation would result in defeating the provisions of the IBC and must be eschewed.

“The stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages.”

[Arun Kumar Jagatramka v. Jindal Steel and Power Ltd., 2021 SCC OnLine SC 220, decided on 15.03.2021]


*Judgement by: Justice Dr. DY Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

Appearances before the Court by:

For appellant: Advocates Sandeep Bajaj and Shiv Shankar Banerjee

For Respondent: Senior Advocates Amit Sibal and Gopal Jain

ALSO READ

NCLAT | Law on maintainability of Compromise and Arrangement application by Promoter during pendency of Liquidation under IBC clarified

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCAT): A Coram of Justice A.I.S. Cheema (Judicial member) and Dr Alok Srivastava (Technical member) dismissed an appeal on the grounds of it being repetitive.

In the instant case, the appellant was aggrieved by non-payment of his salary and illegal actions by the Resolution Professional. The appellant had approached the NCLT for addressing his grievance for payment of his salary or for the inclusion of his salary expenses as CIRP cost in the Resolution Plan. Later an appeal was filed before the NCLAT, which had directed the adjudicating authority to provide an opportunity to the Appellant before taking a decision regarding the Resolution Plan.

Now, the Appellant contended, that the impugned order, the authority did record as intervener but the grievances and detailed arguments/written-submissions advanced by the Appellant before the Adjudicating Authority were not addressed, admitted nor discussed.  Whereas the counsel for the respondent submitted that legitimate grievances of the Appellant were included in the Resolution Plan and also have been duly paid. Further, it was submitted that the present appeal was nothing but a reproduction of the claims made earlier in the appeal.

Therefore, the Coram was of the opining that, “what appears is that the Appellant is reagitating what is already recorded in the order dated 17.02.2021 and only because the liberty was given, the present Appeal is filed”. On the same ground, the appeal stood dismissed.[Sundeep Thakar v. Raj Ralhan, Company Appeal (AT) (Insolvency) No. 170 of 2021, decided on 08-03-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai Bench: The Coram of Janab Mohammed Ajmal (Judicial Member) and V. Nallasenapathy (Technical Member),  decided the issue of whether the Resolution Plan could be shared with the employees of Jet Airways.

Who all are the applicants?

Pilots of Jet Airways (Corporate Debtor) were represented by a Union named National Aviators’ Guild, Maintenance Engineers of the Corporate Debtor under the umbrella of Jet Aircraft Maintenance Engineers’ Welfare Association, Bhartiya Kamgar Sena (BKS) and Jet Airways Cabin Crew Association (JACCA) respectively representing 70% of the ground staff and the majority of the Cabin Crew of the Corporate Debtor and All India Jet Airways Officers’ and Staff Association, they all sought a direction to Respondent (Resolution Professional) to furnish each of the entities/applicants a full copy of the entire Resolution Plan approved by the CoC.

Reasoning | Why do the applicants want to know the details of Resolution plan?

Applicants state that they are unaware of the details of the Resolution Plan and hence they needed to know what was provided under the RP for its members and employees.

Vital concern of the applicants is with regard to the terms and conditions of the Resolution Plan. Further, it has been added that any revival plan, for that matter, both in terms of employment and provision for outstanding wages/dues, is vital for their sustenance and mutual benefit.

Some of the employees have lingered on the rolls of the Corporate Debtor despite the financial hardships and difficulty it entailed.

Adding to the above, it has also been stated that natural justice demands that the applicants remain aware of the Plan and how it is going to take care of their interests or adversely affects them.

Applicants would be the most affected by the orders of this Authority approving or rejecting the Resolution Plan. Thus, it becomes imperative that the Applicants are made privy to the Resolution Plan before it is considered.

Further, the applicants claimed that the Resolution Plan could not be held to be confidential as far as the employees of the Corporate Debtor were concerned.

It is settled law that the interest of the Corporate Debtor is of utmost importance and should be scrupulously protected. 

In view of the above stated, the present application has been filed.

Respondent submitted that the IP Regulations mandate the Resolution Professional to ensure and maintain the confidentiality of the information related to the Insolvency Resolution Process since it contains sensitive information and could only be presented to the CoC.

Analysis, Law and Decision

Bench observed that the applicants interest in the Resolution Plan revolves around the payment/recovery of their dues such as remuneration/wages, other perquisites including terminal benefits if any.

What does Regulations 9 & 22 of the CIRP Regulation lay down?

The stated provision lays down the procedure for the workmen and employees to submit their claims before the IRP/RP.

Regulation 22 of the IP Regulations mandates that an Insolvency Professional must ensure that the confidentiality of the information relating to the insolvency resolution process, liquidation or bankruptcy process is maintained at all time.

Hence, Tribunal held that in view of the above-discussed provisions, the reluctance and refusal of the respondent in sharing the copy of the Resolution Plan with the applicants cannot be faulted.

Natural Justice

Recourse to principles of natural justice and audi alteram partem can be taken when the provisions made in a statute fall short of the requirement and the constitutional validity of the Code has been upheld by the Supreme Court in Swiss Ribbons v. Union of India (2019) 4 SCC 17.

Adjudicating Authority cannot digress from the express provisions of the Statute and act in the manner not provided thereunder or sanctioned by the statute.

Tribunal further explained that in view of express provisions in relation to the Resolution Plan, it is clear that the statutory mandate requires that the Resolution Plan can only be presented to the CoC for its approval and presented before the Adjudicating Authority for its satisfaction in approving the same.

Code or the Regulations thereunder do not contemplate presentation or supply of the Resolution Plan or a copy thereof to any other body or entity. 

Bench agreed with the decision in Anil N. Surwade v. Prashant Jain (IA No. 1033 of 2020 in C.P. (IB) No. 1799 of 2018 decided on 28-09-2020).

“…workmen being at par with the secured creditors are also entitled to privileges of a member of CoC would be fallacious and would go against the grain of the intent and purpose of the Code. “

Bench also added that the applicants are Operational Creditors and the Supreme Court has observed that the role of the Operational Creditors is very limited and confined to the satisfaction of their claims.

Therefore after a wholesome discussion, Tribunal denied any relief to the applicants with a reasoned order.[National Aviators’ Guild v. Ashish Chhawchharia, 2021 SCC OnLine NCLT 50, decided on 22-02-2021]


Image credits of the aircraft: Business Today

National Company Law Tribunal
Hot Off The PressNews

National Company Law Tribunal (NCLT), Hyderabad bench approved NHPC’s Resolution Plan for taking over Jalpower Corporation Limited (JPCL) as going concern vide its order dated 24.12.2020 and uploaded the same on its website on 07-01-2021.

JPCL was executing 120 MW Rangit Stage-IV Hydroelectric Project in Sikkim. The Company is currently undergoing Corporate Insolvency Resolution Process (“CIRP”) which was initiated on April 09, 2019, vide order of Hon’ble NCLT.

NHPC Ltd., a PSU under Ministry of Power, had submitted its Resolution Plan and was declared the successful resolution applicant by Committee of Creditors (CoC) on 24.01.2020. CoC approved Resolution Plan was filed by Resolution Professional with Hon’ble NCLT Hyderabad Bench on 28.01.2020.

NHPC will make an upfront payment of Rs 165 Crore and cost of the project is considered as Rs 943.20 Crore.

Jalpower Corporation Limited is the second company after LancoTeesta Hydro Power Ltd (LTHPL) to be acquired through the NCLT process by NHPC.


Ministry of Power

[Press Release dt. 07-01-2020]

[Source: PIB]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Bench of Justice Bansi Lal Bhat (Acting Chairperson) and Justice Anant Bijay Singh (Judicial Member), Dr Ashok Kumar Mishra (Technical Member), in the present appeal observed,

“Once the Appellant is out of the fray, it has neither locus to call in question any action of any of the stakeholders qua implementation of the approved Resolution Plan nor can it claim any prejudice on the pretext that any of the actions post-approval of the Resolution Plan of Successful Resolution Applicant in regard to its implementation has affected its prospects of being a Successful Resolution Applicant.”

In the instant appeal, the appellant is the ‘Unsuccessful Resolution Applicant’ whose Resolution Plan was rejected by the Committee of Creditors.

Impugned Order passed by the Adjudicating Authority was assailed by virtue whereof the Adjudicating Authority while declining to accede to the prayer for reversal of money to the Successful Resolution Applicant in the event of dismissal of order from Supreme Court, directed the implementation of the approved Resolution Plan.

The above-stated impugned order was assailed on the ground that the erstwhile Committee of Creditors, in connivance with the Successful Resolution Applicant, accepted a re-negotiated fresh Resolution Plan and the application of the Committee of Creditors under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 was not maintainable and shouldn’t have been entertained by the Adjudicating Authority.

Further, On 04-02-2020 Adjudicating Authority had approved the Resolution Plant and in terms of the said plan the Successful Resolution Applicant had to bring in Rs 123 Crores for Resolution within 30 days, however, the Successful Resolution Applicant did not implement the Resolution Plan and the erstwhile Committee of Creditors of the Corporate Debtor, in connivance with the Successful Resolution Applicant, accepted a fresh resolution plan to the detriment of legal rights of the Appellant whose Resolution Plan was rejected on the ground that he could not provide for lump-sum time-bound payment within 30 days of the approval of its Resolution Plan.

Decision

In view of the above-stated Bench opined that the appellant had no locus to question the implementation of the approved Resolution Plan of the Successful Resolution Applicant.

Tribunal observed that,

If the terms of the approved Resolution Plan of Successful Resolution Applicant have been varied or time extended to facilitate its implementation and the creditors have not claimed any prejudice on that count and the Committee of Creditors comprising of the creditors as stakeholders has not objected to same rather been privy to it on account of hardship due to prevailing circumstances, the Appellant cannot be permitted to cry foul.

Hence, it was held that the appellant had no locus to maintain that the change in terms of the approved Resolution Plan in regard to the extension of time for induction of upfront amount as also the implementation of the Resolution Plan jeopardized its legal rights qua consideration of its Resolution Plan which had been rejected.

On finding no merit in the present appeal, it was dismissed. [ Hindustan Oil Exploration Company v. Erstwhile Committee of Creditors JEKPL (P) Ltd., Company Appeal (AT) (Insolvency) No. 969 of 2020, decided on 17-11-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): Full Bench of Justice Bansi Lal Bhat (ACJ) and Justice Anant Bijay Singh (Judicial Member) and Dr Ashok Kumar Mishra (Technical Member), while addressing the present application observed that,

A Resolution Applicant whose Resolution Plan stands approved by Committee of Creditors cannot be permitted to alter his position to the detriment of various stake holders after pushing out all potential rivals during the bidding process.

Appellant emerged as the Successful Resolution Applicant in the Insolvency Resolution Process of Astonefield Solar (Gujarat) Pvt Ltd. (Corporate Debtor) assailed the impugned order rejecting the withdrawal application of its resolution plan and cancellation/ revocation/ return/ refund of the Performance Bank Guarantee, on the ground that there is no legal basis or justification for holding that an application for withdrawal of a Resolution Plan post-approval is not maintainable.

Withdrawal of Resolution Professional

Resolution Professional submitted that the appeal is not maintainable in view of the same being squarely covered by the decision of the Appellate Tribunal in

Committee of Creditors of Educomp Solutions Ltd. v. Ebix Singapore Pte. Ltd., Company Appeal (AT) (Insolvency) No. 653 of 2020, wherein it was held that after approval of the resolution plan by the committee of creditors, the adjudicating authority has no jurisdiction to entertain the application withdrawal filed by the resolution applicant and that adjudicating authority cannot enter into the arena of majority decision of the CoC.

Analysis & Decision

Adjudicating Authority was of the view that it had no jurisdiction to permit the withdrawal of a Resolution Plan, which had been duly approved by the Committee of Creditors. Issue of similar nature was sub-judice before the Supreme Court.

Resolution Plan

Before approval of a Resolution Plan by the Committee of Creditors, the Corporate Insolvency Resolution Process passes through various stages.

I&B Code provides for insolvency resolution in a time-bound manner, the object sought to be achieved, inter alia, being maximization of value of assets of corporate persons and balancing the interests of all stakeholders.

Commercial Wisdom

Further, the bench also stated that primacy is given to the Committee of creditors empowered to take a business decision in regard to the feasibility and viability of a Resolution Plan based on their commercial wisdom.

CIRP Process | Bidding Process

This process is in the nature of a bidding process where, based on consideration of the provisions of a Resolution Plan with regard to the financial matrix, the capacity of the Resolution Applicant to generate funds, infusion of funds, upfront payment, the distribution mechanism and the period over which the claims of various stakeholders are to be satisfied besides the feasibility and viability of the Resolution Plan, a Resolution Applicant emerges as the highest bidder (H1) eliminating the Resolution Plans of Resolution Applicants, which are ranked H2 and H3.

Further, approval of a Resolution Plan by CoC would be binding on the corporate debtor and all the stakeholders only after the Adjudicating Authority passes an order under Section 31 of the I&B Code approving the said plan, it does not follow that the Successful Resolution Applicant would be at liberty to withdraw the Resolution Plan sabotaging the entire Corporate Insolvency Resolution Process.

The said move of Resolution Applicant may push the Corporate Debtor into disastrous consequences wherein the Corporate debtor may be liquidated.

There is no express provision in the I&B Code allowing a Successful Resolution Applicant to stage a U-turn and frustrate the entire exercise of Corporate Insolvency Resolution Process.

“Provision for submission of a Performance Bank Guarantee by a resolution applicant while submitting its resolution plan, as required under the amended provisions of IBBI [Insolvency Resolution Process of Corporate Persons] Regulations, 2016 is a step in this direction, but may not be deterrent enough to prevent a Successful Resolution Applicant from taking a U-turn.”

Tribunal opined that the sanctity of the resolution process needs to be maintained and the Resolution Applicant whose Resolution Plan is approved by the CoC cannot be permitted to withdraw the same.

In view of the above, the appeal was dismissed. [Kundan Care Products Ltd. v. Amit Gupta, 2020 SCC OnLine NCLAT 670, decided on 30-09-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Bench of Justice S.J. Mukhopadhyay, Chairperson and Justice Bansi Lal Bhat, Member (Judicial), set aside the order of the National Company Law Tribunal, Kolkata, for failure to notice the correct position of law regarding maintainability of application under Sections 230 to 232 of the Companies Act, 2013, during pendency of Liquidation proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

By an earlier order of the Appellate Tribunal, the Liquidation proceedings had already commenced against the Corporate Debtor. During the pendency of Liquidation proceedings, an application under the aforesaid sections was preferred by the Promoter of the Corporate Debtor, on which, the NCLT had passed the impugned order directing for taking of steps for the Financial Scheme of Compromise and Arrangement between the Promoter and the Corporate Debtor. 

It is noteworthy at this stage, that earlier, the Resolution Plan submitted by the Promoter was not accepted as he was ineligible to be Resolution Applicant under Section 29-A IBC for committing default. 

Jindal Steel and Power Ltd., one of the unsecured creditors of the Corporate Debtor, preferred the instant appeal under Section 421 of the Companies Act. The challenge was on the following two questions:

(i) Whether in a liquidation proceeding under IBC, the Scheme for Compromise and Arrangement can be made in terms of Sections 230 to 232 of the Companies Act?

(ii) If so permissible, whether the Promoter is eligible to file an application for Compromise and Arrangement, while he is ineligible under Section 29-A IBC to submit a ‘Resolution Plan’?

The Appellate Tribunal answered the first question in affirmative. It relied on the earlier decision in T. Shivram Prasad v. Dhanapal, Company Appeal (AT) (Insolvency) No. 224 of 2018, decided on 27-2-2019, to hold that: “In a Liquidation proceeding under IBC, a petition under Sections 230 to 232 of the Companies Act is maintainable.”.

For answering the second question, the Appellate Tribunal relied on the decision of the Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India, Writ Petition (Civil) No. 99 of 2019, and held that: “Even during the period of Liquidation, for the purpose of Sections 230 to 232 of the Companies Act, the Corporate Debtor is to be saved from its own management, meaning thereby — the Promoters, who are ineligible under Section 29-A, are not entitled to file application for Compromise and Arrangement in their favour under Sections 230 to 232 of the Companies Act.”.

Reference was also made to the proviso to clause (f) of Section 35 IBC, which makes it clear that the Promoter, if ineligible under Section 29-A, cannot make an application for Compromise and Arrangement for taking back the immovable and movable property or the actionable claims of the Corporate Debtor.

The Appellate Tribunal was of the opinion that the NCLT, by its impugned order, though ordered to proceed under Sections 230 to 232 of the Companies Act, failed to notice that such application was not maintainable at the instance of Promoter, who was ineligible under Section 29-A to be a Resolution Applicant.

In such circumstances, the Appellate Tribunal allowed the appeal to set aside the impugned order, and remitted the matter to the Liquidator. [Jindal Steel and Power Ltd. v. Arun Kumar Jagatramka, 2019 SCC OnLine NCLAT 759, decided on 24-10-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): Where an application to initiate Corporate Insolvency Resolution Process (“CIRP”) was moved by the bank-financial creditor, the same was granted, moratorium was imposed on the corporate debtor (“debtor”) and a Resolution Professional (“RP”) was appointed. A Resolution Applicant (“RA”) was found and the said plan was put in place but even after 270 days, the RA had not been able to recover the debt amount. When more time was sought by the debtor, bank, and RP, the Appellate Authority the National Company Law Tribunal, Hyderabad (“AA”), imposed costs on the debtor and bank and passed certain negative remarks against the RP.

The AA observed that the debtor, creditor, as well as the RP were colluding to defeat the process and violate the provisions of the Insolvency and Bankruptcy Code, 2016 (“the Code”) for personal gain. This adverse stance of the AA towards them brought the debtor, creditor and RP to the NCLAT.

The NCLAT held that after the appointment of the RA, the role of the committee of creditors, corporate debtor and RP became obsolete and the RA was the only person managing the affairs of the debtor company. It was incorrect on part of the AA to hold that all of them were conspiring in absence of any evidence to substantiate such allegations and imposing costs. The AA, if it was unsure what order to pass when the RA was unable to deposit the debt money in the escrow account, could have issued him a notice and decide on further steps either by itself or call upon the creditors, debtor, and the RP for their view on the course to be taken further, owing to their understanding of the dynamics of the debtor company.

Since the NCLAT was unable to find any reasoning or proof for labelling the appellants as done by the AA, a part of the AA’s order which imposed costs and made adverse remarks against the RP was set aside and it was left for the AA to decide what steps to be taken under law to materialize the resolution plan. [Indian Bank v. Kadevi Industries Ltd.,2018 SCC OnLine NCLAT 275, decided on 24-05-2018]

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal: The Principal Bench comprising of CJ (Retd.) M.M. Kumar, President and S.K. Mohapatra, Member, accepted and approved the resolution plan submitted by Tata Steel Ltd. (TSL) for the insolvent corporate debtor Bhushan Steel Ltd.

A petition was filed by SBI against Bhushan Steel Ltd. under Section 7 of Insolvency and Bankruptcy Code 2016, pursuant to which Corporate Insolvency Resolution process was commenced. Under Section 15 of the Code, the Resolution Professional invited claims. He also invited resolution plans from prospective Resolution Applicants in terms of the Code, in pursuance to which, 3 Resolution Plans were received, out of which 2 (by TSL and JSW Living (P) Ltd.) were found to be in compliance with the Code and CIRP Regulations. Thereafter, on recommendation of the Committee of Creditors (CoC), TSL was notified as highest scoring resolution applicant. Finally, resolution plan submitted by TSL was approved by CoC. Thereafter, the said resolution plan was placed before NCLT for its acceptance and approval in terms of the Code and CIRP Regulations. According to Sections 30 and 31 of the Code, the Adjudicating Authority (NCLT) must be satisfied that the resolution plan concerned fulfills the requirements of Section 30(2). The Tribunal perused the plan submitted by TSL and found that it fulfills and satisfies all the 6 requirements as envisaged in Section 30(2).

Two objections were filed by ‘Bhushan Employees’ under Section 29(A) of the Code. First objection was that one C. Sivasankaran who was an undischarged creditor must be treated as a ‘connected person’ in terms of Explanation (i) of Section 29(A) as he controlled the Resolution Applicant (TSL). After fact finding, NCLT held that the said person could not be termed as a connected person, and there was no imputation that he was acting in concert with TSL in submitting the Plan. NCLT took notice that there was serious doubt as to locus standi of Bhushan Employees in filing the application as it was not filed by the Authorized body. Second objection pertained to the prosecution and conviction of ‘Tata Steel UK’, which is a 100% subsidiary of TSL. NCLT held that Section 29(d) provides ‘custodial sentence’ as a disqualification but since a Corporate Entity cannot be sentenced to custody, the said disqualification did not affect TSL. Further, it was held that the Resolution Plan protected the rights of the employees and raising objections to the same was a self-defeating proposition.

‘LARSEN AND TOUBRO LTD.’ also filed an application demanding that it may be treated as a ‘secured creditor’ in terms of Sections 30(2) and 31 of the Code. It placed reliance on Section 55(4)(b) of the Transfer of Property Act. However, NCLT held that the said Section applies to immovable property. The plant and machinery, for the payment of which L&T sought status of a secured creditor, could not be treated as immovable property. Thus, demand of L&T was found to be wholly unsustainable.

In view of the above and after extensive perusal of the resolution plan submitted by TSL, National Company Law Tribunal accepted and approved it and gave necessary directions to the Authorities concerned. Further, the applications filed by Bhushan Employees and L&T Ltd. were dismissed with costs amounting to Rs. 1 lakh each. [SBI v. Bhushan Steel Ltd., CA No. 244(PB) of 2018 in CP (IB) No. 201 (PB) of 2017, order dated 15.05.2018]