Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Coram of Justice A.I.S. Cheema, Officiating Chairperson and Alok Srivastava, Technical Member while dismissing an appeal affirmed adjudicating authority’s impugned order on not finding any substance in the appeal.

In the pertinent matter the impugned order of NCLT, Mumbai Bench, Mumbai was challenged where the adjudicating authority disagreed with the Committee of Creditors which had approved ‘success fees’ to the Resolution Professional of an amount of  ₹ 3 Crore. The adjudicating authority had opined, “We believe that if the RP was so certain, he should have claimed/ asked for the success fees in the beginning itself and now when the plan is approved. It was only in the distribution matrix that he/CoC had approved the success fees to the RP. With this observation RP and the CoC to proportionately distribute the said amount of Rs 3 Cr. among the employees/ underpaid operational creditors/unsecured creditors of the corporate debtor and if left, it is to be proportionately distributed among the underpaid operational creditors”. The appellants submitted that the approval of the success fees was a commercial decision of the CoC and the adjudicating authority could not have interfered with the same. To which the adjudicating authority replied in its order that, “…Fixation of fee is not a business decision depending upon the commercial wisdom of the Committee of Creditors”.

Interestingly, Amicus Curiae submitted that there were many instances of exorbitant charging of fees by the resolution professional and the adjudicating authority has interfered so as to rationalise the same. In the present matter, at the last stage when Resolution Plan was being approved the Resolution Professional without putting on record necessary particulars for the success fee got the same included. CoC may be approving the fees but as it has to be reasonable under the provisions of the Code and Regulations, it is justiciable.

The Tribunal while appreciating the support of the Amicus Curiae and concurring with the NCLT’s order opined,

“we hold that ‘success fees’ which is more in the nature of contingency and speculative is not part of the provisions of the IBC and the Regulations and the same is not chargeable. Apart from this, even if it is to be said that it is chargeable, we find that in the present matter, the manner in which, it was last minute pushed at the time of approval of the Resolution Plan and the quantum are both improper and incorrect”.

And further stated that,

“The argument that the Adjudicating Authority should have sent the matter back to the CoC if it was not approving the success fee deserves to be discarded as the Adjudicating Authority while not accepting the success fee merely asked proportionate distribution which would even otherwise have happened if ‘success fee’ was set aside as the money would become available improving percentage of other creditors’ dues”.

[Jayesh N. Sanghrajka v. Monitoring Agency nominated by the Committee of Creditors of Ariisto Developers Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 392 of 2021, decided on 20-09-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Parties:

For Appellant:

Mr Dhruv Mehta, Senior Advocate with Mr Tishampati Sen, Ms Riddhi Sancheti, Mr Ashish Perwani, Mr Devesh Juvekar, Ms Jyoti Goyal and Mr Dikshat Mehra, Advocates.

For Respondents:

(Notice not issued)

Mr. Sumant Batra, Ld. Amicus Curiae

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]

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 Tribunal (NCLT): The Coram of Dr Deepti Mukesh (Judicial Member) and Sumita Purkayastha (Technical Member), reiterated that any shortfall in gratuity payable to employees has to be made over by the Resolution Professional and payment of dues has to be paid outside the waterfall mechanism provided under Section 53 of the Insolvency and Bankruptcy Code, 2016.

The instant application was filed by Sandeep Tyagi on behalf of 52 Ex-Employees of MOSER BAER ELECTRONICS LTD. who sought directions to release the lawful dues of the ex-employees who submitted their resignation prior to the initiation of the CIRP process.

FACTS

Facts pertaining to the present case are that the Corporate Debtor is a wholly-owned subsidiary of MOSER BAER INDIA LIMITED. It is stated that all the employees were forced to resign by the ex-management by March 2019. Further, it was stated that, they were not paid their dues.

The dues were not settled by the ex-management of the Corporate Debtor citing financial instability.

As an application for CIRP was preferred by Autonix Lighting Private Limited (Operational Creditor) under Section 9 of the IBC on account of default. Mr Hemant Sharma was appointed at the Interim Resolution Professional of the Corporate Debtor.

Applicant stated that the Corporate debtor did not deposit Provident Fund till their dates of resignation respectively. The salary slips of the ex-employees show that Provident Fund was deducted every month but admittedly it was not deposited with the EPFO.

Applicant relied on the decision of Principal Bench in CA (PB) No. 19 (PB) of 2019 dated 19-03-2019 filed by the Moser Baer Karamchari Union of the MOSERBAER INDIA LIMITED (Holding Company) against the Resolution Professional in CP No. (IB) 378(PB)/2017 Alchemist Asset Reconstruction Co. Ltd. v. Moser Baer India Limited for release of their dues.

It was observed that the above-stated Order dated 19-03-2019 of the Adjudicating Authority had been challenged before the Appellate Authority. In the Order dated 19-08-2019, the Appellate Authority upheld the same and stated the following:

“Para 24- Once the liquidation estate/asset of the Corporate Debtor under Section 36(1) read with Section 36(3), do not include all sum due to any workman and employees from the provident fund, the pension fund and the gratuity fund, for the purpose of distribution of assets under Section 53, the provident fund, the pension fund and the gratuity fund cannot be included.

Para 25- The Adjudicating Authority having come to such finding that the aforesaid funds i.e., the provident fund, the pension fund and the gratuity fund do not come within the meaning of liquidation estate’ for the purpose of distribution of assets under Section 53. we find no ground to interfere with the impugned order dated 19th March, 2019.”

Bench while parting with the decision held that it would like to fall in line with the ratio laid down by the Principal Bench:

“…any shortfall in gratuity has to be made over by the Resolution Professional and payments of the dues has to be paid outside the waterfall mechanism.”

Bench directed the Resolution Professional to release the dues of the ex-employees and deposit the Provident Fund with EPFO and release Gratuity dues forthwith.[Autonix Lighting Industries (P) Ltd. v. Moser Baer Electronics Ltd., 2020 SCC OnLine NCLT 1111, decided on 19-11-2020]


Advocates for parties:

For Resolution Professional: Milan Singh

For Applicant: Advocate Swarnendu Chatterjee


Ed. Note: See, however, the judgment of NCLAT in Savan Godiwala v. Apalla Siva Kumar, 2020 SCC OnLine NCLAT 191.

Case BriefsSupreme Court

Supreme Court: The 3-Judge Bench of Arun Mishra, B.R. Gavai and Krishna Murari, JJ., set aside the NCLAT’s Order with regard to the appointment of Resolution Professional.

Question for Consideration

Whether an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’?

NCLT’s position

State Bank of India (Financial Creditor) had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 with regard to initiation of Corporate Insolvency Resolution Process before the National Company Law Tribunal, Delhi.

NCLT on noting the objection regarding the proposed ‘Interim Resolution Professional’ — Shailesh Verma directed the Financial Creditor to perform it’s statutorily mandatory obligation by substituting the name of the ‘Resolution Professional’ to act as an ‘Interim Resolution Professional’ in place of Shailesh Verma as it was of the view that Shailesh Verma having worked with the State Bank of India for 39 years before his retirement in 2016, there was an apprehension of bias and was unlikely to act fairly and could not be expected to act as an Independent Umpire.

NCLAT’s position

Aggrieved with the above position, Financial Creditor preferred the appeal before NCLAT on the ground that the proposed ‘Interim Resolution Professional’ Shailesh Verma fulfils the requirement for appointment as ‘Interim Resolution Professional’/ ‘Resolution Professional’ under the ‘I&B Code’ and admittedly bears no disqualification.

NCLAT opined that the apprehension of bias expressed by the ‘Corporate Debtor’ qua the appointment of Shailesh Verma as proposed ‘Interim Resolution Professional’ at the instance of the Appellant — ‘Financial Creditor’ cannot be dismissed offhand and the Adjudicating Authority was perfectly justified in seeking his substitution.

——————————————————————————-

Supreme Court’s position

In the above background, Bench observed at the outset that, NCLAT’s approach was not correct that merely Resolution Professional who remained in the service of SBI and is getting pension was disentitled to be Resolution Professional.

Solicitor General, Tushar Mehta as well as Senior Counsel, Krishnan Venugopal agreed for the appointment of new Resolution Professional by NCLT.

Hence, the Bench held that new Resolution Professional be appointed by the NCLT in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.

While concluding the order, Court stated that the change of Resolution Professional shall not reflect adversely upon the integrity of Resolution Professional concerned, who has been replaced.

Since the impugned order does not reflect the correct approach, the same shall not be treated as a precedent.[State Bank of India v. Metenere,  2020 SCC OnLine SC 837, decided on 19-08-2020]


Also Read:

[SC ALERT] NCLAT’s decoder on appointment of a person as Resolution Professional: Will an ex-employee of Financial Creditor be eligible for appointment? Read on

Case BriefsTribunals/Commissions/Regulatory Bodies

SUPREME COURT ALERT

This NCLAT Order has been set aside by the Supreme Court, the detailed report of which can be found at the end of this piece.

National Company Law Appellate Tribunal (NCLAT): The Coram of Justice Bansi Lal Bhat (Judicial Member), V.P. Singh and Shreesha Merla, Technical Members, addressed a grievance with regard to the appointment of Resolution Professional.

Independent Umpire?

Ex-employee of Financial Creditor appointed as Resolution Professional | NCLT’s position

State Bank of India (Financial Creditor) had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 with regard to initiation of Corporate Insolvency Resolution Process before the National Company Law Tribunal, Delhi.

NCLT on noting the objection regarding the proposed ‘Interim Resolution Professional’ — Shailesh Verma directed the Financial Creditor to perform it’s statutorily mandatory obligation by substituting the name of the ‘Resolution Professional’ to act as an ‘Interim Resolution Professional’ in place of Shailesh Verma as it was of the view that Shailesh Verma having worked with the State Bank of India for 39 years before his retirement in 2016, there was an apprehension of bias and was unlikely to act fairly and could not be expected to act as an Independent Umpire.

No disqualification

Aggrieved with the above position, Financial Creditor preferred the instant appeal on the ground that the proposed ‘Interim Resolution Professional’ Shailesh Verma fulfils the requirement for appointment as ‘Interim Resolution Professional’/ ‘Resolution Professional’ under the ‘I&B Code’ and admittedly bears no disqualification.

Question for Consideration

Whether an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’?

Analysis 

Regulation 3(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that an Insolvency Professional shall be eligible for appointment as a ‘Resolution Professional’ for the ‘Corporate Insolvency Resolution Process’ of a ‘Corporate Debtor’ if he or his partners and directors of the Insolvency Professional Entity are independent of the ‘Corporate Debtor’.

In view of the above-stated regulation, Mr Shailesh Verma came under the ambit of a qualified Insolvency Professional and neither he nor any of his associates were alleged to be connected with the ‘Corporate Debtor’ in a manner rendering him ineligible to act as a ‘Resolution Professional’.

Tribunal referred to the Supreme Court’s decision in Ranjit Thakur v. Union of India, (1987) 4 SCC 611, wherein following was held:

“17. As to the tests of the likelihood of bias what is relevant is the reasonableness of the apprehension in that regard in the mind of the party. The proper approach for the judge is not to look at his own mind and ask himself, however, honestly, “Am I Biased?”; but to look at the mind of the party before him.”

Tribunal’s Opinion

Coram on considering the given set of circumstances opined that the apprehension of bias expressed by the ‘Corporate Debtor’ qua the appointment of Shailesh Verma as proposed ‘Interim Resolution Professional’ at the instance of the Appellant — ‘Financial Creditor’ cannot be dismissed offhand and the Adjudicating Authority was perfectly justified in seeking his substitution.

The said position was notwithstanding the fact that Mr Shailesh Verma was not disqualified or ineligible to act as an ‘Interim Resolution Professional’.

Hence, no legal flaw in the impugned order of NCLT was found. [State Bank of India v. Metenere Ltd., Company Appeal (AT) (Insolvency) No. 76 of 2020, decided on 22-05-2020]


Supreme Court Alert

Supreme Court: The 3-Judge Bench of Arun Mishra, B.R. Gavai and Krishna Murari, JJ., set aside the NCLAT’s Order with regard to the appointment of Resolution Professional.

In the above background, Bench observed at the outset that NCLAT’s approach was not correct that merely Resolution Professional who remained in the service of SBI and is getting pension, was disentitled to be Resolution Professional.

Solicitor General, Tushar Mehta as well as Senior Counsel, Krishnan Venugopal agreed for the appointment of new Resolution Professional by NCLT.

Hence, the Bench held that new Resolution Professional be appointed by the NCLT in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.

While concluding the order, Court observed that the change of Resolution Professional shall not reflect adversely upon the integrity of Resolution Professional concerned, who has been replaced.

Since the impugned order does not reflect the correct approach, the same shall not be treated as a precedent.[State Bank of India v. Metenere, 2020 SCC OnLine SC 837, decided on 19-08-2020]

Legislation UpdatesStatutes/Bills/Ordinances

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 received Presidential assent on 23-09-2020.

Insolvency and Bankruptcy Code (Second Amendment) Act, 2020

Key Features:

Suspension of Initiation of Corporate Insolvency Resolution Process

In light of the extraordinary situation caused by the COVID-19 pandemic, a need was felt to temporarily suspend the initiation of the corporate insolvency resolution process under the Code, initially for a period of 6 months not exceeding one year from 25th March, 2020 to provide relief to the companies in order to recover from the financial stress.

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 was promulgated by the president on 05-06-2020 as the Parliament was not in session at that time.

New Section 10 A replacing Sections 7, 9 and 10 [Temporary Suspension]

(a) To insert a new Section 10A in the Code to provide for temporary suspension of Sections 7, 9 and 10 in respect of any default arising on or after 25-03-2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf; and

EXPLAINER: Temporary suspension of initiation of the corporate insolvency resolution process

Amendment of Section 66

(b) to insert a new sub-section (3), in Section 66 of the Code to provide that no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of the corporate insolvency resolution process is suspended as per Section 10A.

EXPLAINER: Resolution Professional from filing such an application in relation to the defaults for which initiation of CIRP has been prohibited.

Please read the Amended Act here: ACT


Ministry of Law and Justice

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Appellate Tribunal (NCLAT): Justice Bansi Lal Bhat (Judicial), V.P. Singh (Technical) and Shreesha Merla  (Technical) held that an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’.

Background of the case:

The appellant- ‘State Bank of India’- is the ‘Financial Creditor’ has filed an appeal against the NCLT’s cognizance of the objection raised by the ‘Corporate Debtor’- ‘Metenere Limited’- regarding the proposed ‘Interim Resolution Professional’- Mr. Shailesh Verma whose employment under SBI for 39 years created an apprehension of bias, since Mr. Shailesh Verma was unlikely to act fairly and could not be expected to act as an Independent Umpire. The question that arose before the court was whether an ex-employee of one of the parties is qualified to act in the position of ‘Interim Resolution Professional’.

Decision

  • In the current appeal, the tribunal has laid emphasis on the current relationship between IRP and the Financial Creditor, where the former derives a pension from the latter. The Tribunal finds the IRP qualified to be an ‘Interim Resolution Professional’ in his personal capacity but the fact that the Appellant restricted its choice to propose him as IRP shows regard to past loyalty and the long services rendered by him. Further, the filing of instant appeal by ‘Financial Creditor’ shows their dismay at the IRP being asked to be substituted by the impugned order.
  • The relevant statutory provision which the bench looked into for qualification of the IRP is Regulation 3 (1) of the Insolvency and Bankruptcy Board of India,  Company Appeal (AT) (Insolvency) No. 76 of 2020 (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which reads as under: “(1) An insolvency professional shall be eligible to be appointed as a resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.”
  • The likelihood of bias has been measured via the case of Ranjit Thakur v. Union of India, (1987) 4 SCC 611, in which the Supreme court said: “As to the tests of the likelihood of bias what is relevant is the reasonableness of the apprehension in that regard in the mind of the party. The proper approach for the judge is not to look at his own mind and ask himself, however, honestly, “Am I Biased?”; but to look at the mind of the party before him”. The committee finally upholds the impugned order, by saying the Appellant- ‘Financial Creditor’ should not have been aggrieved of the impugned order as the same did not cause any prejudice to it.

[SBI v. Metenere Ltd., Company Appeal (AT) (Insolvency) No. 76 of 2020, decided on 22-05-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A.I.S. Cheema, J. while deciding the present Company Appeal held that the dissenting Financial Creditor in COC cannot be allowed to scuttle CIRP process otherwise the provision permitting COC to take decisions with regard to subjects stated in Section 28(1) by given majority of 66 percent under Section 28(3) would be rendered nugatory.

In the present matter, the Resolution Professional had filed an MA, under Section 60(5) (c) read with Sections 25(1), 25(2) (c) and 28(1) (a) of the Insolvency and Bankruptcy Code, 2016, before the Adjudicating Authority (National Company Law Tribunal, Division Bench, Chennai) to issue a certification approving Interim Finance and any costs related to it, as it forms part of the insolvency resolution process cost and has to be shared between all the members of the Committee of Creditors, in the proportion of their voting rights.

This application was allowed and the COC members were directed to release the Letter of Comfort.

Against developments as above, EARC filed an appeal claiming in view of the amendment to Section 30(4) of IBC read with Section 52(8) of IBC; Insolvency Resolution Process costs which include interim finance can only be recovered from secured creditors and not from unsecured creditors like Appellant. His appeal further raised ground of not being heard before passing the order thereby violating principles of natural justice.

The learned counsel for Resolution Professional submitted that the RP is responsible to keep the corporate debtor a going concern. It was further submitted that there was an urgency to seek orders of the Adjudicating Authority as the appellant was not ready to release the Letter of Comfort and the default would have led to render the corporate debtor ineligible to participate in the tender for power supply. 

The Tribunal opined that the appellant has the right to dissent in a COC meeting, but if the decision is still taken by the majority provided under the statute, all of COC members are duty-bound to abide by the decision.

Reliance was placed on the case of K. Sashidhar v. Indian Overseas Bank, 2019 SCC OnLine SC 257, where it was stated that the commercial wisdom of individual Financial Creditor is non-justiciable.

In view of the above, the appeal was dismissed and no orders as to costs were given; holding that the appellant had not made out a good case that if it was heard, impugned order could have been different. The tribunal found principles of natural justice to be satisfied but could not draw such an interpretation of Sub-Section (4) of Section 30 so as to require only Secured Financial Creditors to contribute towards interim finance and not the Unsecured Financial Creditors. [Edelweiss Asset Reconstruction Company Ltd. v. Sai Regency Power Corpn. (P) Ltd, 2019 SCC OnLine NCLAT 921, decided on 20-12-2019]

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman, Surya Kant and V. Ramasubramanian, JJ has set aside the NCLAT order dated 04.07.2019 in the Essar Steel India insolvency case and has held,

“The NCLAT judgment which substitutes its wisdom for the commercial wisdom of the Committee of Creditors and which also directs the admission of a number of claims which was done by the resolution applicant, without prejudice to its right to appeal against the aforesaid judgment, must therefore be set aside.”

NCLAT had, in the impugned order, held that in a resolution plan there can be no difference between a financial creditor and an operational creditor in the matter of payment of dues, and that therefore, financial creditors and operational creditors deserve equal treatment under a resolution plan. Accordingly, the NCLAT has re-distributed the proceeds payable under the approved resolution plan as per the method of calculation adopted by it so that all financial creditors and operational creditors be paid 60.7% of their admitted claims.

The present appeals and writ petitions were an aftermath of this Court’s judgment dated 04.10.2018 in ArcelorMittal India Private Limited v. Satish Kumar Gupta, (2019) 2 SCC 1.

The Court also answered some important questions which have been elaborated as follows:

Role of Resolution Professional

Resolution professional is a person who is not only to manage the affairs of the corporate debtor as a going concern from the stage of admission of an application under Sections 7, 9 or 10 of the Code till a resolution plan is approved by the Adjudicating Authority, but is also a key person who is to appoint and convene meetings of the Committee of Creditors, so that they may decide upon resolution plans that are submitted in accordance with the detailed information given to resolution applicants by the resolution professional.

“Another very important function of the resolution professional is to collect, collate and finally admit claims of all creditors, which must then be examined for payment, in full or in part or not at all, by the resolution applicant and be finally negotiated and decided by the Committee of Creditors.”

Role of the prospective resolution applicant

The prospective resolution applicant has a right to receive complete information as to the corporate debtor, debts owed by it, and its activities as a going concern, prior to the admission of an application under section 7, 9 or 10 of the Code. For this purpose, it has a right to receive information contained in the information memorandum as well as the evaluation matrix mentioned in Regulation 36-B.

Role of Committee of Creditors

Since it is the commercial wisdom of the Committee of Creditors that is to decide on whether or not to rehabilitate the corporate debtor by means of acceptance of a particular resolution plan, the provisions of the Code and the Regulations outline in detail the importance of setting up of such Committee, and leaving decisions to be made by the requisite majority of the members of the aforesaid Committee in its discretion.

“The Committee of Creditors does not act in any fiduciary capacity to any group of creditors. On the contrary, it is to take a business decision based upon ground realities by a majority, which then binds all stakeholders, including dissentient creditors.”

The decisions relating to management of the corporate debtor cannot be taken without the prior approval of at least 66% of the votes of the Committee of Creditors.

Constitution of a sub-committee by the Committee of Creditors

Sub-committees cannot be constituted for:

  • Exercising of the Committee of Creditors’ powers on questions which have a vital bearing on the running of the business of the corporate debtor.
  • approving a resolution plan.

However, sub-committees can be appointed for the purpose of negotiating with resolution applicants, or for the purpose of performing other ministerial or administrative acts, provided such acts are in the ultimate analysis approved and ratified by the Committee of Creditors.

Jurisdiction of the Adjudicating Authority and the Appellate Tribunal

The Adjudicating Authority generally cannot interfere on merits with the commercial decision taken by the Committee of Creditors. However, the limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of.

If the Adjudicating Authority finds, on a given set of facts, that the aforesaid parameters have not been kept in view, it may send a resolution plan back to the Committee of Creditors to re-submit such plan after satisfying the aforesaid parameters. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal.

Secured and unsecured creditors; the equality principle

Financial creditors are in the business of lending money who are capital providers for companies, who in turn are able to purchase assets and provide a working capital to enable such companies to run their business operation. Whereas operational creditors are beneficiaries of amounts lent by financial creditors which are then used as working capital, and often get paid for goods and services provided by them to the corporate debtor, out of such working capital. Hence,

“If an “equality for all” approach recognising the rights of different classes of creditors as part of an insolvency resolution process is adopted, secured financial creditors will, in many cases, be incentivised to vote for liquidation rather than resolution, as they would have better rights if the corporate debtor was to be liquidated rather than a resolution plan being approved.”

This would defeat the entire objective of the Code which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.

Constitutional validity of Sections 4 and 6 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019

Section 4

So far as Section 4 is concerned, it is clear that the original timelines under Section 12 of the Code in which a CIRP must be completed have now been extended to 330 days, which is 60 days more than 180 plus 90 days. The proviso to Section 12 reads:

“the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor.”

The Court, hence, while leaving the provision otherwise intact, struck down the word “mandatorily” as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution. The effect of this declaration is that ordinarily the time taken in relation to the corporate resolution process of the corporate debtor must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings.

It was, however, explained that on the facts of a given case, if it can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it may be open in such cases for the Adjudicating Authority and/or Appellate Tribunal to extend time beyond 330 days.

Section 6

Section 30(2)(b) of the Code as substituted by Section 6 of the Amending Act is in fact a beneficial provision in favour of operational creditors and dissentient financial creditors as they are now to be paid a certain minimum amount, the minimum in the case of operational creditors being the higher of the two figures calculated under sub-clauses (i) and (ii) of clause (b), and the minimum in the case of dissentient financial creditor being a minimum amount that was not earlier payable. As a matter of fact, pre-amendment, secured financial creditors may cramdown unsecured financial creditors who are dissentient, the majority vote of 66% voting to give them nothing or next to nothing for their dues. In the earlier regime it may have been possible to have done this but after the amendment such financial creditors are now to be paid the minimum amount mentioned in sub-section (2).

It was also noticed that the discretion given to the Committee of Creditors by the word “may” again makes it clear that this is only a guideline which is set out by this sub-section which may be applied by the Committee of Creditors in arriving at a business decision as to acceptance or rejection of a resolution plan.

[Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, 2019 SCC OnLine SC 1478, decided on 15.11.2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): Justice S.J. Mukhopadhaya, Chairperson dismissed an appeal against the order of National Company Law Tribunal, Mumbai filed by Navneet Kumar Gupta, Resolution Professional of Monnet Power Co. Ltd.

In the Corporate Insolvency Resolution Process against Monnet Power (corporate debtor), the respondent Bharat Heavy Electricals Ltd. (operational creditor) filed an application before the Resolution Professional to admit its entire claim of Rs 977,49,97,545 along with interest. On considering the same, the Resolution Professional did not accept part of the claim. NCLT, by the impugned order, held that the Resolution Professional wrongly disallowed the substantial claim in its entirety and directed him to re-examine the claim on basis of the accounts and evidence of BHEL. Aggrieved thereby, the Resolution Professional preferred the present appeal.

The only question which arose for consideration in this appeal was “whether the Resolution Professional had jurisdiction to reject the claim of BHEL in its entirety, without going into evidence?”

The Appellate Tribunal relied heavily on Swiss Ribbons (P) Ltd. v. Union of India, 2019 SCC OnLine SC 73 wherein this issue fell for consideration before the Supreme Court. It was held in that case that a Resolution Professional had no adjudicatory powers. Holding the present case being covered by Swiss Ribbons, the High Court declined to interfere with the impugned order. The Resolution Professional was directed to act in accordance with the directions NCLT. [Navneet Kumar Gupta v. BHEL, 2019 SCC OnLine NCLAT 114, decided on 26-02-2019]