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TMI Blog2021 (8) TMI 553X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of the insolvency resolution process- CIRP of the Corporate Debtor. The NCLAT has upheld the order. B Corporate Resolution Insolvency Process 2 The CIRP of the Corporate Debtor was initiated by an order dated 15 May 2018 of the NCLT. An interim resolution professional- IRP was appointed on 18 May 2018. The IRP issued a public announcement on 21 May 2018 inviting claims from the creditors of the Corporate Debtor. The order of the NCLT admitting the corporate debtor to the CIRP was challenged in appeal, and the order of admission was stayed on 30 May 2018. On 30 April 2019, the NCLAT vacated the stay on the CIRP. The appeal was withdrawn. 3 The CIRP resumed on 7 May 2019. A fresh public announcement was issued by the IRP on 7 May 2019 for inviting claims from creditors. The Committee of Creditors- CoC was constituted on 24 May 2019. On 30 May 2019, the CoC replaced the IRP with Mr. Anish Niranjan Nanavaty as the Resolution Professional- RP. This appointment was confirmed by the NCLT on 21 June 2019. 4 During the course of the process, the RP invited 'Expressions of Interest'-EOI from prospective resolution applicants on 15 July 2019. Fifteen EOIs were received, and a provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P within 330 days, which was expiring on 10.03.2020.' C Approval of Resolution Plan 7 An application was submitted under Section 30(6) of the IBC by the RP, seeking the approval of the resolution plan by the NCLT. The NCLT discussed the salient aspects of the resolution plan in the course of its order on the approval application. The financial terms envisaged in the resolution plan have been tabulated thus: The plan envisages the following payments for the insolvency resolution of the Corporate Debtor as a going concern: 'G. Overall payment under the Plan: Resolution Plan contemplates following payments for the insolvency resolution of the Corporate Debtor as a going concern: Sr No. Particulars Amount (INR) 1. Amount to be infused by Resolution Applicant(Infused Resolution Amount) 3720,00,00,000/- 2. Fund infusion from Effective Date to meet working capital, capital expenditure requirements and/or funding other operational improvements of the Corporate Debtor 450,00,00,000/- 3. Upfront equity infusion against allotment of equity shares of Corporate Debtor (Upfront Equity Infusion) 5,00,00,000/- 4. Payment to Financial Creditors from the value realised from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, the instant Resolution Plan meets the requirements of Section 30(2) of the Code and Regulations 37, 38, 38(1A) and 39(4) of the Regulations. The Resolution Plan is not in contravention of any of the provisions of Section 29A of the Code and is in accordance with law. The same needs to be approved. 15. Doha Bank one of the Financial Creditors has filed IA No. 1960 of2019 inter alia, challenging the admission of claims of few other Creditors and IA No. 3055 of 2019 impugning the decision of the Resolution Professional recognising the Indirect Lenders of the Corporate Debtor as Financial Creditors. The Applications are pending consideration. We are of the considered opinion that pendency of these and other Applications would not come in the way of approval or otherwise of the Resolution Plan. More so, when the Resolution Plan has been unanimously approved by the CoC. The distribution of the payments to the Creditors, Financial or Operational, as the case may be, shall be subject to orders to be passed in the respective Interim Applications within the ambit of the Code. We are thus inclined to dispose of this Application in the following terms. Hence ordered. ORDER i. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NCLT approving the resolution plan in appeal before the NCLAT. The grounds of challenge of the appellants were: (i) The appellants were kept unaware of the CIRP and no details were provided by the RP as regards the disposal of the fund towards their claims; (ii) The claims of the appellants had not received a fair and equitable treatment; (iii) The fair market value and the liquidation value of the Corporate Debtor had not been taken into account and an amount of Rs. 800 crores, being the value of certain preference shares, did not form a part of the corpus of payments to the operational creditors; (iv) There were material irregularities in the accumulation and disbursal of funds that constituted the corpus of the corporate debtor; and (v) The appellants were made to suffer a reduction of 90 per cent of their total claims, while substantial claims of nearly Rs. 120 crores have been rejected. 10 The NCLAT by its judgment dated 4 January 2021 rejected the appeal. The NCLAT noted that there was no substance in the grievance that the operational creditors had been unfairly or inequitably treated in regard to the distribution of funds. As a matter of fact, operational credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in this backdrop that the appeal has been heard finally at this stage. 13 Mr Dushyant Dave, learned Senior Counsel has appeared on behalf of the appellants. Mr Neeraj Kishan Kaul, learned Senior Counsel addressed the submissions on behalf of the Monitoring Committee. 14 Mr Dushyant Dave, learned Senior Counsel, submitted on behalf of the appellants that: (i) The stated object and purpose of the IBC is to balance the interest of all stakeholders and to maximize the value of assets. The long title to the IBC elucidates that the legislation seeks to: '... consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India.' (ii) The CIRP must be just, fair and equitable to all stakeholders, and cannot place the interest of the financial creditors at a higher pedestal at the cost of other stakehol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Applicant would itself buy such assets for Rs. 800 crores and make such funds available for distribution to the specified financial creditors. In apportionment, a sale of Rs. 800 crores exclusively for the benefit of specified financial creditors is a violation of Section 30(2)(b) of the IBC; (vii) The NCLT on an application filed by Doha Bank, a financial creditor of the Corporate Debtor, by its order dated 2 March 2021, set aside the inclusion of these banks (State Bank of India, Bank of India, UCO Bank, Syndicate Bank, Oriental Bank of Commerce and Indian Overseas Bank) from the CoC. Similarly, on the same analogy, various indirect creditors of the Corporate Debtor have also been excluded. The basis of the inclusion of certain financial creditors (this being challenged in the Doha Bank proceedings) was that the Corporate Debtor had executed a deed of guarantee in favour of these banks for securing a rupee loan facility availed by Reliance Communications Limited, the holding company of the Corporate Debtor and Reliance Telecom Limited in violation of the facilities agreement between the consortium of the corporate debtor. The NCLT excluded these banks from the CoC, albeit prosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enior Counsel submits that: (i) In the provisions of the IBC, specific stipulations have been framed in respect of the operational creditors, namely: a. Under Section 30(2)(b), the payment of debts to the operational creditors in the resolution plan shall not be less than the amount to be paid in the event of a liquidation under Section 53; b. Priority in terms of the water fall mechanism contained in Section 53 is provided; and c. Representation of their views in the CoC is envisaged under Section 24(3)(c), through the operational creditors themselves or the representatives if they have aggregate dues which are not less than 10 per cent of the debt of the Corporate Debtor; (ii) If the proceedings were to take place strictly in accordance with the provisions of the IBC, the liquidation value would be zero. However, despite this, the resolution plan has provided for the operational creditors to receive 19.62 per cent of their dues as against 10.32 per cent for the financial creditors; (iii) The order of the NCLT by which six banks were excluded from the CoC has been stayed in appeal by the NCLAT. However, this issue is a non sequitur since the decision of the CoC to approve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Corporate Debtor and to determine the liquidation value and fair value in accordance with Regulation 35(1). These values were placed before the CoC, in accordance with Regulation 35(2) of the CIRP Regulations, upon receipt of the resolution plans. The submission of the appellants that the realisable value from these preference shares is excluded from the liquidation value of the Corporate Debtor has been rebutted by a specific clarification contained in the Monitoring Committee's affidavit, which was filed in these proceedings. As a matter of fact, 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. This statement in the affidavit is duly supported by relevant excerpts from the valuation reports dated 2 January 2020 and 6 December 2019, issued by the appointed valuers. The relevant extract from the report by Mr. Rakesh Narula on the fair value and liquidation value of the Corporate Debtor is set out below: 'Basis of valuation & assumptions: Non-Current Assets: 1) Investment: The bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect relates to the liquidation value. On this, it has 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 is separately considered. The liquidation value of the Corporate Debtor is Rs. 4339.58 crores. The amount being infused by the successful resolution applicant is Rs. 3720 crores. The amount of Rs. 800 crores is a value ascribed under the approved resolution plan to be realised by the Corporate Debtor, pursuant to the remittance of proceeds in respect of the preference shares. Hence, cumulatively, the value being distributed under the approved valuation plan is Rs. 4520 crores. It has been clarified that even if the liquidation value of the realisable value of the 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. (iii) The impact of exclusion 20 The third aspect relates to the order of the NCLT in Doha Bank proceedings. The order of the NCLT in the application which was moved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced upon them in successive decisions of this Court. Section 30(1) envisages the submission of a resolution plan by a resolution applicant. On the submission of the resolution plan, the RP is required to examine it and to confirm, in terms of sub-Section (2) of Section 30, that the plan abides by the statutory requirements spelt out in clauses (a) to (f) 17 '(2) The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan- (a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the payment of other debts of the corporate debtor; (b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than- (i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under Section 53; or (ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of Section 53, whichever is higher, and provides for the payment of debts of fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Adjudicating Authority under Section 31 is to determine whether the resolution plan 'as approved by the CoC' under Section 30(4) 'meets the requirements' under Section 30(2). If the Adjudicating Authority is satisfied that the resolution plan, as approved, meets the requirements under sub-Section (2) of Section 30, 'it shall by order approve the resolution plan' which shall then be binding on the Corporate Debtor and all stakeholders, including those specifically spelt out: '31. (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.' 26 The jurisdiction which has been conferred upon the Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3; or (ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53, whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor. Explanation 1. - For removal of doubts, it is hereby clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors....' In other words, the amount which is payable to the operational creditors towards their debts must at least be either what is provided in sub-clause (i) or sub-clause (ii) of clause (b), whichever is higher. Sub clause (i) refers to the amount paid to the operational creditors in the event of a liquidation under Section 53. Sub-clause (ii) refers to the amount that would have been paid to the operational creditors, if the amount to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h has been laid down is that neither the Adjudicating Authority nor the Appellate Authority can enter into the commercial wisdom underlying the approval granted by the CoC to the resolution plan. The commercial wisdom of the CoC in its collegial capacity is, hence, not justiciable. 32 In K Sashidhar (supra), Justice A M Khanwilkar, speaking for the two-Judge Bench, held: '57. On a bare reading of the provisions of the I&B Code, it would appear that the remedy of appeal under Section 61(1) is against an 'order passed by the adjudicating authority (NCLT)', which we will assume may also pertain to recording of the fact that the proposed resolution plan has been rejected or not approved by a vote of not less than 75% of voting share of the financial creditors. Indubitably, the remedy of appeal including the width of jurisdiction of the appellate authority and the grounds of appeal, is a creature of statute. The provisions investing jurisdiction and authority in NCLT or NCLAT as noticed earlier, have not made the commercial decision exercised by CoC of not approving the resolution plan or rejecting the same, justiciable. This position is reinforced from the limited grounds specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial review by the adjudicating authority or the appellate authority'. 33 The above principles have been re-emphasised and taken further by a three-Judge Bench in Essar Steel India Limited (supra). The Court, speaking through Justice R F Narminan, held: '73. There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or sub-class of creditors is with the Committee of Creditors, but, the decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors. This being the case, judicial review of the Adjudicating Authority that the resolution plan as approved by the Committee of Creditors has met the requirements referred to in Section 30(2) would include judicial review that is mentioned in Section 30(2)(e), as the provisions of the Code are also provisions of law for the time being in force. Thus, while the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the CoC must reflect that it has taken into account the need to: (i) Maximize the value of assets of the CD; and (ii) Adequately balance the interest of all stakeholders, including of operational creditors. The submission of learned Counsel is that in the present case, there was a failure to maximise the value of the assets and to balance the interests of the stakeholders. 36 The submission that there has been a failure to maximise the value of the assets has not been substantiated by any concrete material before the Court, apart from the reference to the preference shares which has already been clarified earlier in this judgment. Whether the interest of all stakeholders, including the operational creditors, has been adequately balanced has to be determined within the four corners of the statutory provisions of the IBC. It must be borne in mind that the jurisdiction of the Adjudicating Authority is circumscribed by the terms of the provisions conferring the jurisdiction. In the present case, the approved resolution plan has in fact provided for the payments to operational creditors, the percentage of recovery being 19.62 per cent. On the other hand, the payment t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial creditors does not lead to the conclusion that such payment must necessarily be the same recovery percentage as financial creditors. So long as the provisions of the Code and the Regulations have been met, it is the commercial wisdom of the requisite majority of the Committee of Creditors which is to negotiate and accept a resolution plan, which may involve differential payment to different classes of creditors, together with negotiating with a prospective resolution applicant for better or different terms which may also involve differences in distribution of amounts between different classes of creditors.' The Court also noted that: '89...by vesting the Committee of Creditors with the discretion of accepting resolution plans only with financial creditors, operational creditors having no vote, the Code itself differentiates between the two types of creditors.' 39 These decisions have laid down that the 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. Nor is there a residual equity based jurisdiction in the Adjudicating Autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a complete code in itself. It 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. It is enacted after due deliberation in Parliament and accords rights and obligations that are strictly regulated and coordinated by the statute and its regulations. To argue that a residuary jurisdiction must be exercised to alter the delicate economic coordination that is envisaged by the statute would do violence on its purpose and would be an impermissible exercise of the Adjudicating Authority's power of judicial review. The UNCITRAL, in its Legislative Guide on Insolvency Law, has succinctly prefaced its recommendations in the following terms Available at accessed 6 August 2021, pg. 14-15 : 'C. 15. Since an insolvency regime cannot fully protect the interests of all parties, some of the key policy choices to be made when designing an insolvency law relate to defining the broad goals of the law (rescuing businesses in financial difficulty, protecting employment, protecting the interests of cre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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