TMI Blog2018 (7) TMI 2251X X X X Extracts X X X X X X X X Extracts X X X X ..... also clear that in 2016 the corporate debtor paid ₹ 50 crores to SBI and after that State bank of India issued no dues certificate DT. 18 October 2016 in favour of corporate debtor. Thus it is clear that SBI, which has 86.18% vote share in the COC was not aggrieved at all. Therefore they have proposed to enhance working capital limits from ₹ 20 crores to ₹ 30 crores - Since approval of resolution plan was mainly dependent on its approval by SBI. Since you SBI was not aggrieved therefore they have not taken care of the dues of other unsecured operational creditors. Since debt of Jya Finance and investment Ltd. is an intragroup debt. The Jya finance and investment Ltd. has always acted as a financial arm of the corporate debtor. In UNCITRAL legislative guide on insolvency law, such type of debt has been treated as an equity contribution rather than as an intragroup loan, with the consequence that intragroup obligations will rank lower priority than the same obligation between unrelated parties - Therefore they can be treated in the waterfall as provided in section 53(1)(h) of the code in the category of the equity shareholders and partners, as the case may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication has been filed by Mr. Vikram Bajaj, RP. 3. The above-referred order of this Tribunal dated 30.05.2017 was challenged in appeal by a director of CD before NCLAT. The Appeal has been dismissed vide order dated 10.05.2018 and the order dated 30.05.2017 stands affirmed. 4. The Resolution Professional has stated in the application that there are only five financial creditors in the Committee of Creditors. One Financial Creditor namely, Jya Finance and Investment Company Limited, being a related party of CD, did not participate in discussion and did not vote. The CoC thus comprised of only four financial creditors, namely State Bank of India (88.18% share), Chirag Credit Capital (P) Ltd. (9.27% share), GCL Commodities P. Ltd. (3.52% share) and Monalisa Vincom P. Ltd. (1.03% share). 5. It is further stated that Notice for invitation of Expression of Interest was published on 26.12.2017 in the newspaper Business Standard after that following two parties showed interest, and they submitted their plans- (i) JR Agro Industries P. Ltd. [from now on referred to JRAL] (ii) Rajasthan Liquors Ltd. [RLL] 6. The Resolution Professional has examined the relevant documents fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solution Professional that the requirements of section 30(2) are satisfied on following grounds: (2) It is further contended by Resolution Professional that requirements of regulations 38 and 39 are also satisfied on the following grounds; 12. It has been emphasized that the approval of resolution plan is mere formality because committee of creditors has approved a resolution plan with 100% vote share and the resolution plan satisfies the requirements of section 30 of The Insolvency and Bankruptcy Code 2016 and CIRP Regulations 38 and 39. 13. The Objections of Operational Creditors, who had filed Petitions under Section 9 of the Insolvency Bankruptcy Code, 2016 (from now on referred to as Insolvency Code ) against the Corporate Debtor M/s. Swadisht Oils (Pvt.) Ltd. (from now on referred to as SOPL ) is as follows: 14. The said five Petitions were admitted vide Judgment and Order dated 31.05.2017 of Adjudicating Authority (NCLT, Allahabad) (Page No. 34 of the rejoinder by JRAGRO). In the said Judgment and Order, (at page 57 of rejoinder, last para), it was also declared that Corporate Debtor - SOPL is 'undischarged insolvent.' 15. The P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Operational Creditors and made preferential payments to the State Bank of India to get bank guarantees of its Promoters released. 20. These transactions are prohibited preferential transactions under Section 43, 45 and 66 of the Insolvency Code, and appropriate orders can be passed by the Adjudicating Authority in this regard as per the Insolvency Code. 21. It is noteworthy that Stock and Trade Inventories has a difference of more than ₹ 5 crores as per information memorandum i.e. (₹ 16,56,36,500 - ₹ 11,44,77,674 = 5,28,95,687/-), and difference between book value of assets and estimated (present) value of assets is short of around 31 crores i.e. (755019240 - 440925644). Both these values are evident at (Page No. 85 of rejoinder by JR AGRO). 22. Further, the Book Value of assets is shown to ₹ 75 crores. while the estimated value is shown to be ₹ 44 crores. This is an unexplained discrepancy of around ₹ 31 crores in the value of assets, out of which there is a discrepancy of ₹ 5 crores in the Inventory itself. Further, the Information Memorandum states that the Account of Corporate Debtor - SOPL is irregular/mismanaged as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as rejected on the ground of ineligibility of JRAGRO due to the bar of Section 29A by Order dated 31.05.2018 passed by this Tribunal. The said Judgment and Order has been upheld by NCLAT in Appeal vide its Order dated 11.07.2018. Therefore, only one Resolution Plan filed by RLL remains under consideration, which was presented before the Committee of Creditors and also approved by the Committee of Creditors with 100% vote share. The objector has raised following objections against the resolution plan: 1.(a) The Committee of Creditors comprised primarily of State Bank of India, which held 88.16% stake and as aforesaid, it was a beneficiary of preferential and fraudulent transaction which are barred under the Insolvency Code. More interestingly, no payment is being made as part of the Resolution Plan to the State Bank of India, despite that, the resolution plan submitted by RLL has been approved by COC. (b) It is submitted that Swadisht Oils (P) Limited and Rajasthan Liquors Limited have common promoters, i.e.. Mr. Tilak Raj Sharma, Mr. Chetan Sharma, Mrs. Rekha Sharma, M/s. Jya Securities Ltd. M/s. Jya Finance Investment Co. Ltd. and M/s. Berry Trading Company. Further. Mr. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulged in preferential transaction, undervalued transaction or fraudulent transaction is barred under Section 29A(a) of the Insolvency Code. (f) As aforesaid, the Promoter Groups are guilty and barred to submit a Resolution Plan through RLL. The Objects and Reasons given for amendment of Section 29A as evident from was explicitly to prevent such Promoters from defrauding its Creditors under guise of the Insolvency Code. (g) Further, the Resolution Plan has various other deficiencies:- i. Different persons, different payments without any rationale. ii. No specific amounts are not mentioned, as such, the Operational Creditors being paid only 5% amount. iii. The resolution plan submitted by RLL is not in consonance with Regulation 38(1A) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 since it pays almost Nil dues of the operational creditors instead pays to related financial creditor, i.e., M/s. Jya Finance Investment Co. Ltd., i.e., 22.73 cr. (page No. 59 of application by RP), in preference to operational creditor, thereby siphoning the money back to the promoters of corporate debtor. iv. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent approving the Resolution Plan. Satisfaction is required to be based upon a conscious decision on examination of the terms of the Resolution Plan. In our humble opinion, a thorough study of a Resolution Plan is required before recording a satisfaction in writing by AA. The satisfaction as mandated in the statute can either objective or subjective or both, but it is a condition precedent. Naturally, this is to be recorded after proper application of mind. The pros and cons of the scheme is required to be studied before recording subjective satisfaction. If the CoC has submitted the scheme of Resolution after visualizing the advantage and disadvantage, then such proposal can be termed as just and equitable fit for according satisfaction. An objective satisfaction revolved around the object of enactment of the Code as enshrined in the Preamble of the I B Code, i.e., to revive the financially stressed corporate body. And the 'subjective satisfaction' depends upon logical analysis of the Financial Data supplied to match with the business model of the Corporate Debtor. A methodical scrutiny of Financial Statement is expected before concurring with the approval of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heat and defraud the Operational Creditors by presenting a Resolution Plan through their Company RLL, which is specifically barred under the Insolvency Code. 29. We have heard the argument of the learned counsels for the parties and perused the record. 30. The Operational Creditors M/s. Abhi Agro Pvt. Ltd., Rungta Industries Pvt. Ltd., Jai Lakshmi Solvents Pvt. Ltd., Arohul Foods Pvt. Ltd. has filed their objections against Resolution Plan submitted by Rajasthan Liquors Ltd. All the above mentioned Operational Creditor have mainly objected that the resolution plan submitted by Rajasthan Liquor Ltd. provides almost NIL value of dues to the Operational Creditors. It is further said that this a unique case under I B Code, where the Operational Creditors who have initiated the proceedings against the Corporate Debtor (Swadisth Oils) to recover their dues have been cheated by the Promoters of the Corporate Debtor. In the resolution plan approved by the Committee of Creditors, the unsecured Financial Creditors have been offered 38% hair cut on their outstanding dues in the resolution plan submitted by Rajasthan Liquor Ltd. (from now on referred as RLL). 31. It is contended by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es markets; (g) has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code; (h) has executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code; (i) has been subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or (j) has a connected person not eligible under clauses (a) to (i). Explanation-- For the purposes of this clause, the expression connected person means-- (i) any person who is the promoter or in the management or control of the resolution applicant; or (ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or (iii) the holding company, subsidiary company, associate company or related party of a person referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lvent given in section 2(a) of The Sales Of Goods Act it appears that the definition is presumptive and restrictive and does not imply that the person is in fact insolvent under Insolvency Law, which is clear from the qualifying word the definition whether he has committed an act of insolvency are not used in the definition. 38. Section 2(8) of The Sales of Goods Act provides that a person is said to be insolvent who has ceased to pay debts in the ordinary course of business or cannot pay his debts as and when it become due whether he has committed an act of insolvency are not. 39. Hon'ble Supreme Court in the case of Thampanoor Ravi v. Charupara Ravi, (1999) 8 SCC 74 at page 87 has held that: 19. The learned Judge noticed that if a person is not to be held an insolvent as in ordinary parlance, it would result in non-application of disqualification even if the court is satisfied that the returned candidate is not in a position to repay debts and could be adjudged to be an insolvent. Article 191(1)(c) does not contemplate mere impecuniosity or incapacity of a person to repay one's debts, but he should not only be adjudged an insolvent but also remain undischar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined in the Indian Contract Act, 1872 (9 of 1872), the Indian Partnership Act, 1932 (9 of 1932), the Securities Contact (Regulation) Act, 1956 (42 of 1956), the Securities Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993), the Limited Liability Partnership Act, 2008 (6 of 2009) and the Companies Act, 2013 (18 of 2013), shall have the meanings respectively assigned to them in those Acts. 40. Given the above provision of the IB code, it is clear that the definition of the word insolvent cannot be imported from its meaning given in The Sales of Goods Act. Since IB code does not define undischarged insolvent, therefore it's definition cannot be imported from its meaning given in The Sales of Goods Act. It is quite clear that the term undischarged insolvent used in various enactments like Companies act, RP Act, etc. for disqualifying and undischarged insolvent from holding public office, as director, contesting election, performing other functions, etc., cannot be understood by importing the meaning of insolvent given in The Sales of Goods Act. 41. The admission of the petition under IB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vency laws permit classes of unsecured creditors that are not entitled to priority to consent, by vote of the requisite majority of the class, to ranking different from that applying to distribution in liquidation under the insolvency law. A class of ordinary unsecured creditors that will not be paid in full might consent, for example, to distribution to a class of subordinated claims or equity holders. Claims and expenses that are administrative claims or are entitled to be paid in priority are generally required to be paid in full for a reorganisation plan to be confirmed, except to the extent that the holder of the claim or expense agrees to different treatment. Some laws require the court to assess additional matters, such as whether the plan can be considered to be fair in respect of those classes whose interest are modified or affected by the plan but which nevertheless have voted to approve the plan. 46. In the UNICITRAL report, it is specifically mentioned that similarly ranked creditors are treated equally. In the resolution plan, the recent dues of operational creditors have been given preference. The resolution plan provides hundred percent payment to the operational ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re promoters of SOPL. The dues of two promoters are being completely written off, and the other unsecured financial creditors will be paid only ₹ 24.60 crores. Thus the unsecured financial creditors are taking a haircut of ₹ 16.66 crores (they are being paid only ₹ 24.60 crores against their aggregate dues of ₹ 41.26 crores). Jya Finances taking the highest haircut of ₹ 13.93 crores. As against this, the operational creditors are getting a bonanza of rupees hundred lakh (under law not entitled to anything). In spite of the above huge haircut, Jya Finance has not raised any objection to payment of rupees hundred lakh to operational creditors which would have been otherwise gone to reduce their haircut. Thus there is absolutely no arbitrariness or unfairness in distribution of liquidation value to the operational creditors. Section 53(1)(d) treats all unsecured financial creditors at par so far as priority for their payment is concerned and does not discriminate between unrelated creditors and related creditors. It is further said that express legal provisions cannot be bypassed even on the ground of equity. The plan submitted by RLL is in conformity wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buted among operational creditors is ₹ 100 lakhs, whereas total admitted claim amount is ₹ 9,64,12,009/-. This shows that the operational creditors are getting negligible amount in the proposed plan. Emphasis has been given on the water fall mechanism as provided U/s. 53 of the Code, which provides priority to the unsecured financial creditors over above the claim which falls under the category of other debts and dues of the corporate debtor. 58. It is pertinent to mention that section 31(1) of the Code provides that if the Adjudicating Authority is satisfied that the resolution plan as approved by the COC under sub-section 4 of Section 34 meets the requirement as referred 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, guarantors and other stake holders involved in the resolution plan. 59. It is important to point out that after approval of the resolution plan by the Adjudicating Authority, the resolution plan has binding effect on the all the stake holders, which includes operational creditors also. The operational creditors did not get the opport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly between and among the following:-- (i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date; (ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest; (f) any remaining debts and dues; (g) preference shareholders, if any; and (h) equity shareholders or partners, as the case may be. (2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the liquidator. (3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction. Explanation-- For the purpose of this section-- (i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... misuse the machinery for their benefit, at the cost of unsecured operational creditors. 67. The irony is, the unsecured operational creditors, being placed last, will get only after the financial creditors claim are satisfied, to the extent, the funds are available to offer. In fact, in many cases, the operational creditors might end up with no payment at all. All because of the prioritisation contemplated under section 53, as discussed below - which besides being applicable in liquidation, is also relevant for ascribing liquidation values under resolution plan. 68. Notably, distinction under section 53 is a two-fold distinction- (i) secured/unsecured, and (ii) operational/financial. As regards secured creditors, it does not matter whether the creditor is financial or operational, since section 53(1)(b) uses the expression secured, and there is no indication as to the nature of debt (financial/operational) owed to such secured creditor. However, when it comes to unsecured creditors, unsecured financial creditors appear in the 4th rank; but unsecured operational creditors come in the 6th rank. 69. As seen above, the unsecured financial creditors have been raised above gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, including MSMEs, are a part of the real sector. (iii) How will MSMEs continue to supply goods and services on credit to their customers, if they were to be told that if the customer goes into a default, all the money will go first to bankers, and money will be paid to the suppliers only if there is a surplus left? 73. For the reasons discussed above, the distinction between unsecured creditors, inter-se, under section 53 does not seem to be consistent with the umbrella objective of equitable treatment, 74. In Germany, a distinction is being made between secured, unsecured creditors and employees for giving priority in payment during insolvency resolution. 75. United Nations Commission on International Trade Law (UNCITRAL): Chapter 4 Reorganization Clause 54 deals with the binding dissenting classes of creditors, which is as given below: 54. As noted above, a few States that provide for voting on approval of a plan by secured and priority creditors and for the creation of different classes of unsecured creditors and also include a mechanism that will enable the support of one or more classes to make the plan binding on other classes (including, under some laws, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Operational creditors are also unsecured creditors, but the priority of claims of unsecured financial creditors over and above the claim of unsecured operational creditors is unique in I B Code, 2016 only, whereas such distinction is not provided in Insolvency laws, prevalent in US, UK Germany. United Nations Commission on International Law has specifically provided related parties claims rank lower to the other ordinary unsecured claims. 77. Here, in this case, a peculiar situation has been created on account of the priority given to the related unsecured financial creditors over and above the payment of other ordinary creditors. 78. In most of the countries, preference has been given only on the basis, secured unsecured creditors, but different classification has been here for distribution of liquidation estate between unsecured financial creditor and operational creditors. Though, both come under the same category, i.e., unsecured creditors. This particular case, is a glaring example where admittedly a related party, which is a resolution applicant in this case, because of getting priority over operational creditor, he is getting 22.73 Crores out of 36.66 Crores o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the claim of unsecured financial creditors over the unsecured operational creditors. Under the UNCITRAL Legislative Guide to Insolvency Law, clause 77 provides that related persons claim to be subordinated to the claims of the ordinary unsecured claims. They are rank inferior to the claims of other unsecured creditors, under I B Code, 2016, unsecured financial creditors, even though that creditors happens to be a related party of the corporate debtor, are rank higher to the claims of operational creditors in water fall mechanism, which appears to be discriminatory. 83. Ld. Counsel for the Resolution Professional has contended that Adjudicating Authority has no power to interfere in the commercial wisdom of the COC and in a case, where Resolution Plan has been approved by the COC with 100% vote share, then there should not be any modification in the plan submitted by the COC. 84. It is pertinent to mention that the Section 31 of the I B Code provides that after approval of the resolution plan by the Adjudicating Authority, the resolution plan shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stake holders, involved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons corporate debtor has taken advance from RLL and after some time it was refunded. It appears that Jya financial investment Ltd. which is a related party and shareholder of the corporate debtor has acted as a financial arm of the corporate debtor. It also appears that the liquidation value of the corporate debtor company would have been positive after paying secured creditor (bank) and unsecured financial creditors (unrelated), but on account of proposed payment to related party Jya finance, nil liquidation value is calculated. The operational creditors can be paid as per their admitted claims, but deliberately in the considered resolution plan, the debt of JR financial is also deducted to calculate the liquidation value, which is illegal and unjust. If promoters fund is considered for calculation of liquidation value then in every case of defaulted/loss-making companies, the liquidation value will always be nil, and operational creditors will never get their dues in I B cases. 89. The learned counsel for the resolution applicant has contended that the commercial wisdom of COC is unquestionable and Adjudicating Authority can't impose a decision on COC. To discuss this le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore they have not taken care of the dues of other unsecured operational creditors. 96. Since debt of Jya Finance and investment Ltd. is an intragroup debt. The Jya finance and investment Ltd. has always acted as a financial arm of the corporate debtor. In UNCITRAL legislative guide on insolvency law, such type of debt has been treated as an equity contribution rather than as an intragroup loan, with the consequence that intragroup obligations will rank lower priority than the same obligation between unrelated parties. 97. Therefore they can be treated in the waterfall as provided in section 53(1)(h) of the code in the category of the equity shareholders and partners, as the case may be which is below the rank of both the unsecured financial creditors and as well as other debts and dues. 98. Para 55, UNCITRAL legislative guide of insolvency law deals with the provision of subordination of claims, which is as follows: 55. When in the natural person or organisation owes debts to more than one creditor, the priority scheme established in the applicable law bracket which may provide for subordination of certain types of claim, for example, those of related persons) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the company Law and the corporate charter. Debt claims, such as those relating to loans, however, are not always subordinated. 77. Related persons: The category of creditors that may require special consideration is that of persons related to the debtor, whether in a familial or business capacity (see chapter II, para 183, and above, para 48). Under some insolvency laws, these claims are always subordinated, and under other laws, they are subordinated only on the basis of India to inequitable conduct. Where they are subordinated, the claims may rank after ordinary unsecured claims. Other approaches for treatment of these claims do not relate to ranking, but to restrictions on voting rights are to the amount of percentage of the claims that will be admitted in the proceedings. 92. Intra-group debts: Intragroup debts may be dealt with in a number of ways. Under some insolvency laws, intragroup transactions may be subject to avoidance proceedings. Under some insolvency laws that provide for consolidation, intragroup obligations are terminated by the consolidation order. Other approaches involve classifying intragroup transactions differently from similar transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the category of equity shareholders are partners as provided in section 53(1)(h) of the Code. Their claim will be treated at par with equity shareholders are partners, who are other unsecured creditors they rank below the operational creditors of the corporate debtor. 103. The clause 7.5 the approved resolution plan deals with income tax liability including minimum alternate tax (MAT) if any arising on account of settlements/waiver of liability is by financial and operational creditors as part of the Resolution Plan. It is stated in the plan that: there are remissions and waivers of liabilities as granted by the financial creditors and operational creditors as part of the resolution plan, would result in right off of part of liabilities towards them. Such right of being remission of liabilities which are acceptable remissions in nature does not fall in purview of Income Tax Act. However, there have been many instances where the income tax authorities have raised income tax demand resulting from profit to the assessee from right off of liabilities to creditors. Such liability if any shall entirely derail the resolution plan and shall marginalize the effect of compromises s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax department is not party at this stage, therefore without hearing the department on this point, we cannot approve such resolution for granting exemption in respect of income tax liability that may crystallize in future. Thus clause 7.5 of the approved resolution plan cannot be accepted. 105. In the circumstances, to give justice to the operational creditors, we think it appropriate to direct the Resolution Professional to modify the resolution plan in the light of observation given in the body of the judgment. We further direct that the unsecured debt of related party which is intragroup debt will be treated as an equity contribution rather than as an intragroup loan, with the consequence that the intragroup obligation will rank lower in priority than the same obligation between unrelated parties . 106. Thus the intra group debt given by Jya Finance Investment Co. Ltd., a related company of the corporate debtor be classified at par with other equity shareholder and partners as provided in water fall mechanism provided in Sec. 53(1)(h) of the Code. It is further directed that all the operational creditor should be treated equally without being also classified by their ag ..... 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