2025 (5) TMI 1923 - AT - IBC

Rejection of application praying for approval of Resolution Plan submitted by the Successful Resolution Applicant - valid ground for rejecting the Resolution Plan exists or not - HELD THAT - Present is a case where the creditors in class i.e. homebuyers consist the majority of CoC who have approved the Resolution Plan with 91% vote share. In event any increase in the CIRP Cost is made that would be undertaken by the homebuyers. The said provision cannot be said to be irrational. Further the direction in Para 18(a) that said increase in cost shall be met by SRA cannot be approved. The CoC in its commercial wisdom which consist of majority of homebuyers creditors in class having undertaken to bear the increased cost if any no exception can be taken in said clause. It is relevant to notice that Valuers were appointed by the Resolution Professional as per Regulation 27 of the CIRP Regulations who submitted its Valuation Report. Value of the assets of the Corporate Debtor is asked for to assist the CoC to take decision. It is relevant to notice that order impugned does not show that any stakeholder has raised any objection to the valuation done by the Valuers. The Appellant has relied on judgment of the Hon ble Supreme Court in M. K. Rajagopalan vs. Dr. Periasamy Palani Gounder Anr. 2023 (5) TMI 344 - SUPREME COURT where the order passed by NCLAT rejecting the Resolution Plan and remanding the matter to the committee of creditors with directions to the resolution professional to proceed from the stage of publication of Form G. One of the issue raised was regarding valuation. The Hon ble Supreme Court in the above case has occasion to consider Regulation 27 and 35 of CIRP Regulation. It has been held that CoC being fully satisfied and having endorsed the process of valuation and re-evaluation there was no reason to interfere with the order of the NCLT. The finding of this Tribunal on the question of valuation was not approved. Another judgment which has been relied is judgment of the Hon ble Supreme Court in Ramkrishna Forgings Ltd. Vs. Ravindra Loonkar Resolution Professional of ACIL Ltd. Anr. 2023 (11) TMI 910 - SUPREME COURT . The Hon ble Supreme Court in the above case held that no objection having been raised by any stakeholder with regard to any deficiency/ irregularity there was no occasion to direct for re-valuation. Thus when no objection to the valuation conducted of the Corporate Debtor was raised by any stakeholders it was not open for the Adjudicating Authority to enter into the issue of valuation of assets of the Corporate Debtor and to make the said ground for rejecting the Resolution Plan. The Adjudicating Authority in Para 18 has also referred to certain statutory liabilities as shown in the balance sheet as on CIRP date of the Corporate Debtor and has observed that they have not been considered in the Resolution Plan. On direction issued by the Adjudicating Authority by order dated 22.08.2024 an affidavit was filed by the SRA that all statutory liabilities including GST workmen labour cess compensation etc. would be borne by the SRA. When the SRA as per the order of the Adjudicating Authority has filed compliance affidavit in Para 18(viii) payment to certain creditors including statutory liabilities which was shown in the balance sheet were not required to be mentioned. Only one claim was filed which was admitted. It is not shown that other creditors have filed any claim - There are no ground to reject the resolution plan since the creditors shown in the balance sheet have not filed their claim and the Resolution Plan does not deal with their claim. Present is a case where public announcement was made the proviso to Regulation 6A is also relevant which contains an exception that where it is not possible to send a communication to creditors the public announcement made under regulation 6 shall be deemed to be the communicated to such creditors. The rejection of the Resolution Plan is unsustainable - The Resolution Professional is not supposed to include every explanation with regard to matters covered in the plan and the Resolution Plan is a primary document which refers to various clauses contained in the plan. The Adjudicating Authority has failed to point out any violation of Section 30(2) in Para 18 of the judgment on the basis of which rejection of the resolution Plan can be sustained. The Adjudicating Authority committed error in rejecting application. Conclusion - i) Unless there is violation of Section 30(2) in a resolution plan the Adjudicating Authority cannot reject the approval of Resolution Plan by the CoC in its commercial wisdom. ii) The Adjudicating Authority committed error in rejecting the Resolution Plan on the grounds noted in the impugned order. The Resolution Plan approved by the CoC with requisite majority and meeting the requirements of Section 30(2) must be approved. The impugned order is set aside - appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Adjudicating Authority was justified in rejecting the application for approval of the Resolution Plan submitted by the Successful Resolution Applicant (SRA) despite its approval by the Committee of Creditors (CoC) with requisite majority;

- Whether objections raised by the Adjudicating Authority regarding valuation of assets of the Corporate Debtor, including alleged non-consideration of certain assets and discrepancies between balance sheet values and valuation report, constitute valid grounds for rejection of the Resolution Plan;

- Whether non-compliance with Regulation 6A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations), particularly regarding communication to creditors, was established and if it justifies rejection of the Resolution Plan;

- Whether the clause in the Resolution Plan relating to the prosecution and distribution of proceeds from proceedings in respect of avoidance transactions (PUFE applications) in favour of the SRA is permissible under the statutory framework;

- Whether admitted claims exceeding amounts reflected in the balance sheet provide a valid basis for rejecting the Resolution Plan;

- The extent of judicial interference permissible with the commercial wisdom exercised by the CoC in approving a Resolution Plan under Sections 30 and 31 of the Insolvency and Bankruptcy Code, 2016 (I&B Code).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Rejection of Resolution Plan Despite CoC Approval

The legal framework mandates under Section 31(1) of the I&B Code that the Adjudicating Authority shall approve a resolution plan if it is satisfied that the plan meets the requirements of Section 30(2). Section 30(2) enumerates conditions including payment of insolvency resolution costs, operational creditors' dues, management of affairs post-approval, and compliance with applicable laws.

The Court noted that the CoC, comprising predominantly homebuyers, approved the Resolution Plan with 91.55% voting share. All appellants-the CoC, Resolution Professional (RP), and SRA-contended that the plan was compliant and prepared in accordance with the CIRP Regulations and the I&B Code. They argued that the Adjudicating Authority's reasons for rejection were not valid grounds under the statutory framework.

The Court emphasized the settled principle that judicial interference with the commercial wisdom of the CoC is limited and can only be exercised if the plan violates provisions of Section 30(2). The impugned order failed to demonstrate any such violation. Hence, the rejection was not justified.

Issue 2: Objections Regarding Valuation of Assets

The Adjudicating Authority raised concerns that certain assets appearing in the balance sheet were valued at nil or significantly less in the valuation report prepared by IBBI-registered valuers appointed under Regulation 27 of the CIRP Regulations. It questioned whether all assets were duly considered and pointed to discrepancies between balance sheet values and valuation figures.

The Court observed that no stakeholder, including any member of the CoC, had raised objections to the valuation process or the valuation report. The valuation was conducted by qualified valuers in accordance with the law, and the CoC was fully apprised and satisfied with the process.

The Court relied on binding precedents from the Supreme Court which held that the valuation process endorsed by the CoC should not be interfered with by the Adjudicating Authority unless there is a clear statutory violation. It noted that the valuation of certain assets at nil or lower values was a professional valuation judgment, especially for items such as TDS receivables, MAT credit, and GST credit, which may not have realizable value at the CIRP date.

Therefore, the Adjudicating Authority's objections on valuation were held to be uncalled for and insufficient to reject the Resolution Plan.

Issue 3: Compliance with Regulation 6A (Communication to Creditors)

Regulation 6A requires the interim resolution professional to send communication along with the public announcement to all creditors as per the last available books of accounts. The Adjudicating Authority found non-compliance with this regulation, citing lack of communication to some creditors.

The RP filed a detailed compliance affidavit demonstrating that individual notices were sent to creditors who had not filed claims, with proof of postal dispatch and returns. The affidavit also showed that belated claims received after the Request for Resolution Plan (RFRP) issuance were duly considered and approved by the CoC.

The Court noted that the Adjudicating Authority did not consider the compliance affidavit and that the proviso to Regulation 6A provides that if it is not possible to send communication, the public announcement suffices as communication.

Accordingly, the Court held that the Adjudicating Authority's finding of breach of Regulation 6A was unsustainable.

Issue 4: Clause Regarding PUFE Applications and Distribution of Proceeds

The Resolution Plan provided that any recoveries from avoidance transactions (Preferential, Undervalued, Fraudulent, or Extortionate transactions - PUFE) would be pursued by the SRA and proceeds would vest exclusively with the SRA. The Adjudicating Authority objected to this clause.

The Court examined Regulation 38(2)(d) of the CIRP Regulations, which permits a resolution plan to specify the manner of pursuing avoidance transactions and distribution of proceeds. The Court held that since the plan was approved by the CoC with a substantial majority, and the provision is expressly contemplated by the regulations, no objection could be sustained.

Issue 5: Admitted Claims Exceeding Balance Sheet Amounts

The Adjudicating Authority noted that certain admitted claims were higher than the amounts reflected in the balance sheet as on the CIRP date and questioned the justification for such discrepancies.

The Court observed that the admitted claims were verified and collated in accordance with the CIRP Regulations and that the balance sheet is not the sole document for claim verification. Increases in claim amounts were attributed to interest and other legitimate factors, which cannot be faulted.

Hence, this ground was insufficient to reject the Resolution Plan.

Issue 6: Extent of Judicial Interference with Commercial Wisdom of CoC

The Court reiterated the principle established by the Supreme Court that the commercial wisdom of the CoC, which is the decision-making body in the CIRP, is to be respected and not subjected to undue judicial scrutiny. Intervention is warranted only if the Resolution Plan violates provisions of the I&B Code, particularly Section 30(2).

The Court cited authoritative judgments emphasizing minimal judicial interference and the importance of the CoC's role in deciding the fate of the Resolution Plan.

In the instant case, the Adjudicating Authority failed to identify any violation of Section 30(2) that would justify rejection.

3. SIGNIFICANT HOLDINGS

"The scope of interference with the commercial wisdom of the CoC is now well settled. Unless there is violation of Section 30(2) in a resolution plan, the Adjudicating Authority cannot reject the approval of Resolution Plan by the CoC in its commercial wisdom."

"When no objection regarding valuation of the Corporate Debtor was raised by any stakeholder, it was not open for the Adjudicating Authority to raise objection with regard to not valuing certain assets shown in the balance sheet."

"The observation of the Adjudicating Authority that there is breach of Regulation 6A is unsustainable where the Resolution Professional has filed a compliance affidavit demonstrating communication to creditors and the proviso to Regulation 6A provides that public announcement shall be deemed communication where individual communication is not possible."

"The provision in the Resolution Plan providing that the Successful Resolution Applicant shall pursue avoidance transactions and recoveries shall vest with it is permissible under Regulation 38(2)(d) of the CIRP Regulations and cannot be a ground for rejection."

"The balance sheet is not the sole document for verification of claims. Increase in admitted claims over balance sheet amounts on account of interest or other factors cannot be faulted."

"The Adjudicating Authority committed error in rejecting the Resolution Plan on the grounds noted in the impugned order. The Resolution Plan approved by the CoC with requisite majority and meeting the requirements of Section 30(2) must be approved."