2025 (5) TMI 1220 - AT - IBC

Approval of Resolution Plan without prior approval from the Competition Commission of India (CCI) - assignment of debt by an Asset Reconstruction Company (ARC) to a non-ARC entity under the Resolution Plan - contravention of the SARFAESI Act 2002 and the Reserve Bank of India (RBI) Master Directions (Asset Reconstruction Companies) 2024 - Debt owed to Respondent No.4- International Finance Corporation can be assigned to an entity in India without specific approval by the RBI or not - SRA has dealt with Noida Project Land which is not the asset of the Corporate Debtor - Approval of Resolution Plan without prior approval from the Competition Commission of India (CCI) - HELD THAT - As per Section 30(4) the CoC is to approve the Resolution Plan by vote not less than 66% voting share of the Financial Creditors after considering its feasibility and viability and the manner of distribution proposed. The Resolution Plan in the present case has been approved with 73.38% vote share. Resolution Plan approved by the Adjudicating Authority is binding on all including the Dissenting Financial Creditor. The 1st ground on which order approving the Resolution Plan by the Appellant is challenged on the strength of Section 5 of the Competition Act 2002. Counsel for the Appellant relied on judgment of the Hon ble Supreme Court in Independent Sugar Corporation Ltd. 2025 (2) TMI 19 - SUPREME COURT decided on 29.01.2025. The Hon ble Supreme Court in the said judgment has laid down that approval of the CCI as contemplated under Section 31(4) proviso of the IBC has to be mandatorily obtained before approval of the plan by the CoC. Section 6 of the Competition Act 2002 deals with regulation of combinations which contemplated approval by the CCI for such merger and amalgamation amounting to combination. Counsel for the Appellant contended that the assets of the SRA as well as the Corporate Debtor after merger are more than prescribed threshold which are more than Rs.2500 Crore assets in India hence meets the threshold of combination under Section 5 of the Competition Act. Thus mandatory approval from the CCI was required prior approval of the plan by the CoC - The Notification dated 07.03.2024 provided that Section 5 of the Competition Act is not applicable for two years where the value of the assets being acquired taken control of merged or amalgamated is not more than Rs.450 Crore in India or turnover of not more than Rs.1250 Crores in India. In the Consolidated Reply filed by the Resolution Professional balance sheets of the Corporate Debtor as on 31.03.2023 and 31.03.2024 have been referred to and brought on record. As per the balance sheets of the Corporate Debtor who is being acquired under the Resolution Plan the value of the Corporate Debtor is Rs.70.76 Crore and the turnover is Rs.13.72 Crores. The value of the Corporate Debtor as above is clearly covered by exemption provided in Notification dated 07.03.2024 - Section 5 of the Competition Act 2002 is not applicable in the facts of the present case and there was no requirement of any prior approval from CCI. Hence the submission advanced by the Appellant cannot be accepted. Assignment of debt by ARC - permissible to non-ARC or not - HELD THAT - On looking into Section 9(1)(e) of the SARFAESI Act 2002 settlement of dues payable by the borrower is also one of the measures contemplated for purposes of asset reconstruction. We are of the view that the settlement of dues is a phrase of wide import which can take measure for settlement of dues payable by the borrower. In the present case Resolution Plan submitted by the Respondent No.2 which is approved by requisite vote share of the CoC provides for the payment of dues of the Financial Creditor. The debt has been categorised in sustainable and unsustainable debt and sustainable debt discharge is the payment proposed by the Resolution Applicant to the secured Financial Creditors whereas unsustainable debt is the balance amount claim of secured creditors which is noticed in paragraph 7.2 of the impugned order. The plan proposes the secured financial creditors Rs.99.05 Crores within 30 days of the approval of the Resolution Plan. Sustainable debt is being discharged by payment to the financial creditors and unsustainable debt being assigned to the Resolution Applicants it is the commercial wisdom of the CoC to approve or not approve the mode and manner of settlement of dues and in the present case when settlement of dues have been approved by the CoC by 73.38% vote share it is not persuaded to accept the submission that the assignment of the unsustainable debt to the Resolution Applicants violates any provision of the IBC or CIRP Regulations or any provisions of the SARFAESI Act 2002 - there are no substance in the submission of the Appellant. Debt owed to Respondent No.4- International Finance Corporation can be assigned to an entity in India without specific approval by the RBI or not - HELD THAT - The CoC as well as the SRA had submitted that approval of the RBI if required for assignment of debt of Respondent No.4 is to be obtained within one year from approval of the Resolution Plan. As per provision of Section 31(4) of the IBC the SRA can obtain approval from RBI after approval of the Resolution Plan once the assignment has been approved. There are no error in the above part of the Resolution Plan which proposes assignment of debt of Respondent No.4 to the Resolution Applicant. Approval if any can be obtained within one year from the RBI as per Section 31(4) hence on the said ground approval of Resolution Plan cannot be faulted. SRA has dealt with Noida Project Land which is not the asset of the Corporate Debtor - HELD THAT - The Noida Project Land along with building structure was obtained by sub-lease deed dated 18.01.2008 and lease deed dated 23.06.2008 from Moser Baer India Ltd. (MBIL). MBIL went into liquidation under the Code and liquidator of MBIL vide letter of termination dated 30.03.2019 addressed to the Corporate Debtor has cancelled the said sub- lease and the Noida Project Land along with the pending litigation has been assigned to Palika Towns LLP by the Liquidator of MBIL. The submission of SRA in the above regard is that lease was terminated prior to initiation of CIRP. With regard to which the litigation is pending before the NCLT SRA has acknowledged the pending litigation and offered to pay the lessor Rs.7, 20, 00, 000/- as a solution to ending the dispute regarding the project. The money offered to the lessor is in addition to the payments to be made to the financial creditors under the Resolution Plan of the SRA Appellant cannot raise any grievance nor above clause in the Resolution Plan dealing with the manner proposing a solution for Noida Project Land and continue the litigation by SRA with regard to Noida Project Land does not violate any provisions of the IBC or CIRP Regulations. The Resolution Plan cannot be said to have violated any provisions of the law in the above regard. There are no substance in the above submission. Conclusion - i) The Competition Act s provisions on combination and CCI approval do not apply and the Resolution Plan s approval without CCI consent is valid. ii) No violation of SARFAESI Act or RBI directions was found; the assignment of debt to a non-ARC entity under the Resolution Plan is valid. iii) The assignment of debt from the ECB lender to the Resolution Applicant is permissible subject to subsequent RBI approval. iv) The plan s provisions regarding the Noida Project Land comply with the IBC and CIRP Regulations and do not violate any legal provisions. v) The CoC s commercial wisdom in approving the Resolution Plan and rejecting the revised offer is binding and not subject to interference. There are no substance in any of the submissions of the Counsel for the Appellant. There is no merit in the Appeal. The Appeal is dismissed.

Summary

The core legal questions considered by the Appellate Tribunal in this matter include:

1. Whether the approval of the Resolution Plan by the Committee of Creditors (CoC) without prior approval from the Competition Commission of India (CCI) violates Section 5 and Section 31(4) proviso of the Competition Act, 2002, particularly in light of the Supreme Court judgment in Independent Sugar Corporation Ltd.?

2. Whether the assignment of debt by an Asset Reconstruction Company (ARC) to a non-ARC entity under the Resolution Plan contravenes the SARFAESI Act, 2002 and the Reserve Bank of India (RBI) Master Directions (Asset Reconstruction Companies) 2024?

3. Whether the assignment of debt from an External Commercial Borrower (ECB) lender (International Finance Corporation) to a non-ECB lender without prior RBI approval is permissible under the Insolvency and Bankruptcy Code (IBC) and related laws?

4. Whether the Resolution Plan's provision regarding the Noida Project Land-sub-leased property whose lease was terminated prior to CIRP initiation and which is subject to ongoing litigation-violates the IBC or includes impermissible third-party assets?

5. Whether the CoC failed in its commercial wisdom by not accepting a higher revised financial offer made by an unsuccessful Resolution Applicant after the approval of the Resolution Plan, thereby failing to maximize the value of the Corporate Debtor?

Issue-wise Detailed Analysis

1. Applicability of Competition Act, 2002 and Requirement of CCI Approval

Legal framework and precedents: Section 5 of the Competition Act, 2002 defines "combination" including mergers or amalgamations exceeding specified asset or turnover thresholds. Section 31(4) of the IBC, with a proviso, mandates that where a Resolution Plan contains a provision for combination as per Section 5 of the Competition Act, approval of the CCI must be obtained prior to CoC approval of the plan. The Supreme Court in Independent Sugar Corporation Ltd. held that such CCI approval is mandatory before CoC approval.

Court's interpretation and reasoning: The Tribunal examined the thresholds prescribed under Section 5, which include asset values and turnover limits. The Corporate Debtor's value was Rs.70.76 Crores and turnover Rs.13.72 Crores, both well below the thresholds for mandatory CCI approval. Furthermore, the Ministry of Corporate Affairs issued a Notification dated 07.03.2024 exempting combinations below Rs.450 Crores asset value or Rs.1250 Crores turnover from Section 5 for two years. The Tribunal held that this exemption applies, rendering Section 5 and the proviso to Section 31(4) inapplicable in the present case.

Application of law to facts: Since the Corporate Debtor's financials fall below the exemption threshold, no prior CCI approval was required before CoC approval of the Resolution Plan. The Tribunal rejected the Appellant's contention that the combination exceeded thresholds.

Treatment of competing arguments: The Appellant argued that the combined asset value post-merger exceeded Rs.2500 Crores, triggering Section 5. The Respondents relied on the MCA notification and the Corporate Debtor's audited financials to demonstrate exemption. The Tribunal accepted the latter.

Conclusion: The Tribunal concluded that the Competition Act's provisions on combination and CCI approval do not apply, and the Resolution Plan's approval without CCI consent is valid.

2. Assignment of Debt by ARC to Non-ARC Entities

Legal framework and precedents: The SARFAESI Act, 2002, particularly Section 9, empowers ARCs to undertake asset reconstruction measures including settlement of dues. RBI's Master Directions (Asset Reconstruction Companies) 2024 regulate ARC activities and provide conditions under which ARCs may act as Resolution Applicants under IBC.

Court's interpretation and reasoning: The Tribunal analyzed Section 9(1)(e) of the SARFAESI Act, which permits "settlement of dues payable by the borrower" as a broad term encompassing various modes of settlement. The RBI Master Directions allow ARCs to undertake securitization and asset reconstruction activities and to participate as Resolution Applicants with specified conditions. Clause 10 of the Master Directions permits ARCs to formulate plans for realization of financial assets, including settlement of dues.

Key evidence and findings: The Resolution Plan classified debt into sustainable and unsustainable categories, with sustainable debt to be paid and unsustainable debt assigned to the Resolution Applicant. The CoC approved this arrangement with requisite voting share.

Application of law to facts: The Tribunal found that the assignment of unsustainable debt to the Resolution Applicant is a permissible mode of settlement under the SARFAESI Act and RBI directions. The CoC's commercial wisdom in approving this plan is binding and not subject to interference.

Treatment of competing arguments: The Appellant argued that ARCs cannot assign debt to non-ARCs, relying on the Master Directions. The Respondents countered that no prohibition exists, and the plan is compliant. The Tribunal sided with the Respondents.

Conclusion: No violation of SARFAESI Act or RBI directions was found; the assignment of debt to a non-ARC entity under the Resolution Plan is valid.

3. Assignment of Debt from ECB Lender to Non-ECB Lender

Legal framework: Section 31(4) of the IBC allows the Resolution Applicant to obtain necessary approvals under any law within one year from the date of approval of the Resolution Plan by the Adjudicating Authority.

Court's interpretation and reasoning: The Tribunal noted that if RBI approval is required for assignment of debt from the International Finance Corporation (an ECB lender) to a non-ECB lender, such approval can be obtained post-approval of the Resolution Plan within the statutory period.

Application of law to facts: The plan's proposal for assignment is not invalidated by the lack of prior RBI approval, as the law permits obtaining such approval within one year post-approval.

Conclusion: The assignment of debt from the ECB lender to the Resolution Applicant is permissible, subject to subsequent RBI approval.

4. Treatment of Noida Project Land in the Resolution Plan

Legal framework: The IBC and CIRP Regulations do not permit inclusion of third-party assets in the Resolution Plan. However, pending litigation over disputed assets may be acknowledged and addressed in the plan.

Court's interpretation and reasoning: The Tribunal observed that the Noida Project Land was sub-leased to the Corporate Debtor, but the sub-lease was terminated prior to CIRP initiation by the lessor's liquidator. The asset was assigned to a third party, with litigation pending. The Resolution Plan acknowledged this litigation and proposed to pay the lessor Rs.7.2 Crores as a settlement offer, in addition to payments to financial creditors.

Application of law to facts: The plan's approach to continue litigation and offer settlement does not constitute inclusion of third-party assets but is a legitimate mechanism to resolve disputes. The Appellant lacked locus to challenge this aspect as it pertains to third-party rights and ongoing litigation.

Conclusion: The plan's provisions regarding the Noida Project Land comply with the IBC and CIRP Regulations and do not violate any legal provisions.

5. Commercial Wisdom of the CoC and Consideration of Revised Offer

Legal framework and precedents: Section 30(4) of the IBC requires approval of the Resolution Plan by a vote of not less than 66% of voting shares of financial creditors. The commercial wisdom of the CoC is generally non-justiciable, as reiterated in this Tribunal's judgment in Yogesh Kelkar & Ors. vs. Resolution Professional.

Court's interpretation and reasoning: The Tribunal noted that the CoC approved the Resolution Plan with 73.38% vote share. Although the unsuccessful Resolution Applicant (Respondent No.5) submitted a revised offer of Rs.120 Crores after the voting commenced, the CoC declined to consider it, consistent with the RFRP and Challenge Process Document which prohibited modification of financial offers after the Challenge Process.

Application of law to facts: The Tribunal held that the CoC's decision to reject the revised offer was within its commercial discretion and binding. The unsuccessful Resolution Applicant's separate appeal challenging rejection of its revised offer was dismissed by the Tribunal, precluding the Appellant from raising this ground.

Conclusion: The CoC's commercial wisdom in approving the Resolution Plan and rejecting the revised offer is binding and not subject to interference.

Significant Holdings

"The statutory provision and legislative intent unequivocally affirm the mandatory nature of the proviso to Section 31(4) of the IBC. For a Resolution Plan containing a combination, the CCI's approval to the Resolution Plan, in our opinion, must be obtained before and consequently, the CoC's examination and approval should be only after the CCI's decision." (Supreme Court, Independent Sugar Corporation Ltd.)

"The value of the Corporate Debtor being Rs.70.76 Crores and turnover Rs.13.72 Crores is clearly covered by exemption provided in Notification dated 07.03.2024, hence Section 5 of the Competition Act, 2002 is not applicable in the facts of the present case and there was no requirement of any prior approval from CCI."

"Settlement of dues payable by the borrower is a phrase of wide import which can take measure for settlement of dues payable by the borrower. The classification of debt into sustainable and unsustainable and assignment of unsustainable debt to the Resolution Applicant is a permissible mode of settlement under the SARFAESI Act, 2002 and RBI Master Directions."

"The CoC's decision to approve the Resolution Plan with 73.38% vote share is binding on all stakeholders including dissenting financial creditors. The commercial wisdom of the CoC is sacrosanct and not subject to judicial interference."

"The Resolution Plan's provisions regarding the Noida Project Land and continuation of litigation do not violate any provisions of the IBC or CIRP Regulations."

"Approval of the Resolution Plan by the Adjudicating Authority is valid and binding, and the appeal challenging such approval on the grounds raised by the Appellant is dismissed."