TMI Blog2022 (5) TMI 460X X X X Extracts X X X X X X X X Extracts X X X X ..... rage value of Rs.123.66 crores. Even if the CoC thought it fit to get another valuation of a more recent date, it was desirable that the procedure outlined in regulations 27 and 35 should have been followed. The source of payment for valuation is not a material factor insofar as valuation figures are concerned nor will they have any impact on them. They are really disjointed activities. Moreover, in the present case the third valuation estimates the liquidation value as Rs. 52.69 crores, which is even less than half of the liquidation value estimated earlier and hence significantly different from the two earlier valuations. Thus, the procedure of obtaining a third valuation and then considering it as basis for deciding the payment particularly of the operational creditors under Section 30(20(b) defective and not in accordance with the stipulated norms and procedure under the CIRP Regulations. The CoC did consider the variance between the two earlier liquidation valuation estimates and the third one and desired explanation regarding the same. The explanation could have been obtained from the three valuers since they had carried out the valuation exercise and would be in a positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rachit Batra, Advocate For the Respondent:- Mr. Gopal Jain, Sr. Advocate with Mr. Abhishek Anand, Mr. Nazim Khan, Advocates, Mr. Mandeep Kalra, Ms. Radhika Narula, Ms. Shrishti Singh, Ms. Divya Singh Pundir, Ms. Kanak Malik, Mr. Rishabh Lekhi and Mr. Kanay Pisal, Advocates J U D G M E N T (VIRTUAL MODE) [Per.: Dr. Alok Srivastava, Member (Technical)] The two appeals, namely first one preferred by Rana Saria Poly Pack Private Limited [CA (AT) (Ins) No. 422 of 2021] and the second one preferred by Simbhaoli Sugars Ltd. [CA (AT) (Ins) No. 741 of 2021] have been filed under section 61 of the Insolvency and Bankruptcy Code, 2016 (hereinafter called IBC ). The appellants in both appeals are aggrieved by the order dated 17.3.2021 in IA No. 290 of 2020 in CP/IB/ALD/ No. 120 of 2017 (hereinafter called Impugned Order ). Both the appeals are being disposed of by this common judgment as the issues raised in both the appeals pertain to the same Impugned Order. 2. The Appellant in CA No. 422 of 2021 M/s. Rana Saria Poly Pack Private Limited has stated that the corporate debtor -a Special Purpose Vehicle constituted as a Joint Venture Company of M/s. Simbhaoli Sugar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs Limited, the Appellant has stated that the resolution plan submitted by Respondent No. 3/M/s. NCIRCLE Exim LLP was approved vide the Impugned Order dated 17.3.2021 in respect of the corporate debtor Uniworld Sugars Pvt. Ltd. without considering the fact that the entire exercise of CIRP was carried out against the interest of the stakeholders and in violation of the mandatory provisions of IBC. He has added that the Resolution Professional and CoC proceeded to seek contrary reliefs from the Adjudicating Authority under Chapter II and Chapter III of the IBC, and once proceedings under section 33 in Chapter III of IBC had commenced upon filing of CA (AT) (Ins) No. 83 of 2019 by the Resolution Professional, the CoC became functous officio and could not consider and approve a resolution plan which was prepared in accordance with erroneously obtained report of the liquidation amount which was not acceptable to the stakeholders. He has further stated that the resolution plan approved by the Impugned Order has resulted in transfer of the business of the company at a value which is much below its actual worth causing loss to all the stakeholders including the creditors. He has also state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at pp.42-51 of the Rejoinder of Appellant to Respondent No.1 s reply) to show that the members of CoC also had questions about going for a third valuation of the fair and liquidation value of corporate debtor s assets. In particular, he has referred to the discussion noted in the minutes of the 20th CoC meeting at pp.46-48 of the Rejoinder Affidavit to show that the Resolution Professional pointed out in the meeting that he had, in an earlier 15th meeting of the CoC, apprised the members that no further fresh valuation was required to which they had consented. The minutes also note the view of Ms. Nancy Agarwal, authorized representative of Union Bank of India that under Regulation 27 of CIRP Regulations, the Resolution Professional has been given the power to obtain a third valuation report in case of major disparity in the initial two valuations and that the cost of valuation should be included in the CIRP cost. The Learned Counsel for Appellant has urged that the cost of third valuation if met by CoC members will not be in accordance with CIRP regulations, and furthermore in undertaking the third valuation only one valuer for each class, namely, (i) Securities or Financial Asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 Date of Constitution of CoC 19th June, 2018 6 Date of first meeting of CoC 28th June, 2018 7 Date of appointment of RP 7th July, 2018 (2ndCoC Meeting). Result of 1voting was declared on 12 July, 2018. 8 Date of appointment of Registered Valuers 16th July, 2018 9 Date of Issue of Invitation for EOI. 21st August, 2018 (as per Form G dated 20.08.2018) published on 21.08.2018 in Business Standard. English edition and Jansatta Hindi edition. 10 Date of final List of Eligible Prospective Resolution Applicants The Corporate Insolvency Resolution Process in the matter of Uniworld Sugars Private Limitged was commenced w.e.f. 29.05.2018 and as on date of commencement of CIRP Regulation 36B of the IBBI CIRP Regulations was not into existence. It was inserted vide Notification No. IBBI/2018-19/GN/REG031, dated 3rd July, 2018 (w.e.f. 04-07-2018). Xx xx xx xx 7. The amounts provided for the stakeholders unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the resolution plan on 17.3.2021 without getting the benefit of the Forensic Audit Report, and this is clearly visible in para 11 of the Impugned Order. 9. The Learned Counsel for Appellant has also claimed that the forensic audit report has brought out a number of irregularities such as an entry of Rs. 44.59 crores which is unexplained (at page 21 of Forensic Audit Report submitted vide Diary No. 33108) and also that an amount of Rs.3.50 crores becomes Rs. 2.43 crores (at page 21 of the Forensic Audit Report). He has thus claimed that these irregularities, which have been brought out in the forensic audit report should have been brought before the Adjudicating Authority for a well-considered adjudication on the resolution plan. Therefore, he has urged, the Resolution Professional and the CoC have failed in their duty of bringing the Forensic Audit Report before the Adjudicating Authority. He has further pointed out that under section 35(n) and section 43 of IBC, the duties of the Resolution Professional are very clearly defined and the status report should have been placed before the CoC and the Adjudicating Authority by the Resolution Professional. Furthermore, when the Fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereupon the Adjudicating Authority ordered that pending IAs will be reheard. He has further pointed out that despite such orders of the Adjudicating Authority, the IAs which were ordered to be reheard were never reheard. He has urged that the 330 days of permissible extended CIRP period also expired on 9.7.2019 but in the absence of any order for extension of the CIRP period, all the actions of the CoC taken thereafter are not valid in law. On these grounds too, he has urged that the Impugned Order dated 17.3.2021 should be quashed and set aside as it has considered the third valuation report, much after the permissible period of CIRP was over and no extension was granted. 12. The Learned Counsel for Appellant in CA No. 741 of 2021 has urged that the CIRP Regulations framed by the Insolvency and Bankruptcy Board of India (IBBI) are quite relevant which should be scrupulously followed in undertaking valuation of the assets of the corporate debtor and the Insolvency and Bankruptcy Board of India (IBBI) should be made irrelevant by the CoC exercising arbitrary powers for conducting evaluation of liquidation value. He has also pointed out that in the Maharashtra Seamless Limited c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in the present case was undertaken after a lapse of more than two years from th2 date of first two valuations and on the basis of the decision taken by the CoC in its 20th meeting. He has added that insofar as alleged high CIRP cost of Rs. 8 crores is concerned, it is approved by the CoC and therefore this decision cannot be challenged. He has urged that the object of the IBC is to effect financial revival of the corporate debtor and liquidation should be the last resort as has been held by the Hon ble Apex Court in the matter of Swiss Ribbons Pvt. Ltd. vs. Union of India ( 2019 4 SCC 17) and Kridhan Infrastructure Pvt. Ltd. vs. Venkatesan Sankar Narayan and Others (CA No. 3299 of 2020) and therefore the Adjudicating Authority and the CoC have acted in furtherance of these aims and objectives of the IBC. He has also cited the judgment of Hon ble Apex Court in the matter of Maharashtra Seamless Ltd vs. Padmanabhan Venkatesh and Anr. 2021 SCC OnLine SC 569 wherein it is held that the object behind a valuation is to assist the CoC to take a well-considered decision on the resolution plan and once a resolution plan is approved by the CoC, the statutory mandate of the Adjudicating Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution plan is based on a low third liquidation valuation and is therefore faulty is not supported in the light of this judgment. He has also urged that there is no allegation made against the Successful Resolution Applicant in the present appeals and therefore the Successful Resolution Applicant should not be made to suffer if baseless allegations are made about the liquidation valuation process and value. 18. On rejoining, the Learned Counsel for Appellant has reiterated that the third valuation of liquidation value was not done in accordance with the extant CIRP Regulations and the CoC could have only taken an informed decision on a resolution plan only on the basis of a properly obtained valuation report, and since it was not done, there was a material irregularity in the approval of the resolution plan. He has also urged that this tribunal should look into the fact that the so called land prices have been shown to fall sharply in the third valuation report and the explanations/justification for such a fall is based on the opinion of the CEO of the corporate debtor, who has conflict of interest being related to the erstwhile corporate debtor and hence, it should not be reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the period of five years preceding the insolvency commencement date; (d) a partner or director of the insolvency professional entity of which the resolution professional is a partner or director. (4) The invoice for fee and other expenses incurred by a professional appointed under this regulation shall be raised in the name of the professional and be paid directly into the bank account of such professional. Regulation 35 of CIRP Regulation,2016 35. Fair value and Liquidation value. (1) Fair value and liquidation value shall be determined in the following manner:- (a) the two registered valuers appointed under regulation 27 shall submit to the resolution professional an estimate of the fair value and of the liquidation value computed in accordance with internationally accepted valuation standards, after physical verification of the inventory and fixed assets of the corporate debtor; (b) if in the opinion of the resolution professional, the two estimates of a value are significantly different, he may appoint another registered valuer who shall submit an estimate of the value computed in the same manner; and (c) the average of the two closest estimate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch other actions as may be specified by the Board. Section 30(2) (b) (1) (2) of IBC, 2016 30. Submission of resolution plan. XX XX XX XX (2) The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan XX XX XX XX (b) provides for the payment of the 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 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 cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the CIRP Regulations that two registered valuers should be appointed under regulation 27. These two registered valuers so appointed shall submit to the Resolution Professional an estimate of the fair value and liquidation value computed in accordance with internationally accepted valuation standards, after physical verification of the inventory and fixed assets of the corporate debtor. Further Regulation 35 stipulates that that if in the opinion of Resolution Professional, the two estimates are significantly different, the Resolution Professional may appoint another registered valuer who shall submit an estimate of the value computed in the same manner and the average of two closest estimates of a value shall be considered as the fair value or the liquidation value. These estimations shall be communicated by the Resolution Professional to the members of the CoC after the receipt of the resolution plan, after receiving an undertaking from the members that they shall maintain confidentiality of the same. 21. Thus, we note that the appointment of the registered valuers is to be done in accordance with the stipulated procedure in the CIRP Regulations and also how the fair and liqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plained that in 15th COC meeting matter of fresh valuation of assets was discussed, and the COC members in that meeting had consented that no further fresh valuation is required. However in 17th COC meeting the COC considered a third valuation report submitted by a resolution applicant (RA) in support of its resolution plan and took note of the same. This third party valuation was carried out by Sakuma Exports Limited one of the earlier Resolution Applicants and the said valuation report was circulated to the COC members of the corporate debtor on 21st May, 2020. In 17th Meeting, COC agreed that this valuation should be the basis of the approval of the resolution plan being submitted by NCircle. In 19th COC meeting which was called on the requisition of PNB in relation to some alleged disparity in the distgr8ibution of resolution plan amount (Requisition request was received just one day prior to the closing of ongoing E voting for 18th COC meeting). In that meeting PNB also raised some queries on third party valuation. However never proposed fresh valuation in 19th COC Meeting. Mr. Mukul asked to Mr. Madaan whether there can be commercial wisdom to carry out the valuation at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded in the CIRP cost. Mr. Madaan replied that as communicated to him, there was no major disparity between the two valuations of 2018 and, therefore, third valuation as per regulation 27 was not required. All the compliances have been done in 2018 and since there was no resolution plan, liquidation application was filed. Under special circumstances this particular resolution plan was being discussed by6 COC, is not in ordinary course of law but in pursuant of directions of Hon ble NCLT and therefore it was upto COC to consider any valuation in its commercial wisdom. 24. Later, in the 21st meeting of the CoC (minutes attached at pp.52-68 of the Rejoinder of Appellant to the replies of Respondents No. 1 and 2), the matter of third valuation was discussed at agenda item no. 4 and the following is recorded:- xx xx xx xx While discussing the valuation report received from the valuers appointed on behalf of the COC, PNB representative suggested that a clarification should be sought from previous valuers on difference between the earlier values and present values. RP replied that after more than two years gap it would be difficult to seek any clarification or justification of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 30(20(b) defective and not in accordance with the stipulated norms and procedure under the CIRP Regulations. 26. We also note that the CoC did consider the variance between the two earlier liquidation valuation estimates and the third one and desired explanation regarding the same. The explanation could have been obtained from the three valuers since they had carried out the valuation exercise and would be in a position to explain the methodology and reason for divergence in values. It, therefore, appears surprising that rather than obtain explanation from the earlier valuers, the CEO of the erstwhile corporate debtor, who would have been an interested party and could have had a clouded opinion, was approached to provide this explanation. We do not think such an explanation would be fair and free from being coloured with possible conflict of interest. Therefore, taking it as the basis for calculating payments under the resolution plan cannot be considered as an error-free exercise. 27. Thus it is quite clear that the members of the CoC had concerns about the appointment of the third valuer and later about the low liquidation value in the third report. The Resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operational creditors have to be made in accordance with the provision in section 30(2)(b) of the IBC, and the calculation of amounts of payments has to be made with reference with the liquidation value and the order of priority given in section 53(1). 32. The Ld. Counsel for Respondents has adverted that Hon ble Supreme Court has considered the issue of extension of CIRP period in order to obtain a resolution plan of the corporate debtor which was held to be a validly obtained resolution plan and eventually approved and held in the matter of Binani Industries Limited vs. Bank of Baroda Anr. (2018 SCC OnLine NCLAT 521) as follows:- 43. From the two resolution Plans , it will be clear that the Rajputana Properties Private Limited in its resolution Plan has discriminated some of the financial Creditors who are equally situated and not balanced the other stakeholders, such as Operational Creditors . Therefore, the Adjudicating Authority has rightly held the Resolution Plan submitted by Rajputana Properties Private Limited to be discriminatory. 60. .. 25. Duties of resolution professional. Xx xx xx xx (6) The resolution professional may, with the approval of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered. 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 approval resolution plan to be realized 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 realizable 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. 34. A contention raised by the Ld. Senior Counsel of Respondents is that the judgment of Hon ble Supreme Court in the matter of Maharashtra Seamless Ltd. vs. Padmanabhan Venkatesh and Others [(2020) 11 Supreme Court Cases 467)holds that commercial wisdom overrides the consideration on equity and payments are possible to be made below the liquidation value, wherein the following is held:- 28. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble NCLAT. 35. In essence the judgment of Hon ble Supreme lays down that the resolution plan should be compliant of sub-section (2) of section 30. The Ld. Counsel for Appellant has sought to distinguish this judgment by pointing out that in theinstant case the very sub-stratum of obtaining a fresh liquidation report and the valuation contained therein are in question, and the quantum of liquidation value is relevant when deciding the payments to operational creditors under section 30(2)(b) of the IBC. 36. On the issue of the commercial wisdom of CoC being of prime relevance in allocating payments under the resolution plan, the Ld. Counsel of Respondents has cited the judgment in the matter of Committee of Creditors of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta Ors. [(2020) 8 Supreme Court Cases 531) wherein Hon ble Supreme Court has held as following:- 46. This is the reason why Regulation 38(1A) speaks of a resolution plan including a statement as to how it has dealt with the interests of all stakeholders, including operational creditors of the corporate debtor. Regulation 38(1) also states that the amount due to operational credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 37. Regarding the commercial wisdom of CoC in approving a resolution planHon ble Supreme Court has also held in its judgment dated 13.5.2021 held in the matter of India Resurgence ARC Private Limited vs. Amit Metaliks Ltd. Another [2021 SCC Online SC 409] that the business decision taken in exercise of the commercial wisdom of Committee of Creditors cannot be interfered with unless creditors belonging to a class being similarly situated are denied fair and equitable treatment. The relevant portion of this judgment is as hereunder: 10. As regards the process of consideration and approval of resolution plan, it is now beyond a shadow of doubt that the matter is essentially that of the commercial wisdom of Committee of Creditors and the scope of judicial review remains limited within the four-corners of Section 30(2) of the Code for the Adjudicating Authority; and Section 30(2) read with Section 61(3) for the Appellate Authority. In the case of Jaypee Ken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77.3. The material propositions laid down in Essar Steel (supra) on the extent of judicial review are that the Adjudicating Authority would see if CoC 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 have been taken care of. And, if the Adjudicating Authority would find on a given set of facts that the requisite parameters have not been kept in view, it may send the resolution plan back to the Committee of Creditors for resubmission after satisfying the parameters. Then, as observed in Maharashtra Seamless Ltd. (supra), there is no scope for the Adjudicating Authority or the Appellate Authority to proceed on any equitable perception or to assess the resolution plan on the basis of quantitative analysis. Thus, the treatment of any debt or asset is essentially required to be left to the collective commercial wisdom of the financial creditors. 38. It is noted from the above-mentioned judgments that while commercial wisdom of the CoC is the most important factor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ramod Kumar Sharma RP of Uniworld Sugars Private Limited vs. ED F Man Commodities India Private Limited Claim of Rs. 69 crore, receivable by the CD from ED F Man Commodities India Pvt. Ltd. being the cost of sugar sold. 3. CP No. (IB) 120/ALD/2017, CA No. 237/2018 Mr.Pramod Kumar Sharma RP of Uniworld Sugars Private Limited vs. ED F Man Commodities India Private Limited Claim made against erstwhile promoters. 41. It is noted that orders on these applications were reserved by the Adjudicating Authority on 28.2.2019. But after a change of bench, the applications were heard again. It was expected that the Adjudicating Authority would pass orders on these applications before finalising the resolution plan since these applications related to recovery of approximately Rs. 85 crores from the erstwhile promoters of the corporate debtor and if these applications would have been decided in the corporate debtor s favour they had the potential of changing the scheme of payments under the resolution plan. 42. The detailed discussion in aforementioned paragraphs regarding the third valuation report on fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises the payments to be given to stakeholders and creditors resolution plan in the light of the liquidation value of Rs. 123.66 crores and puts it up to the CoC for consideration and necessary approvals. 46. We, therefore, set aside the impugned order and the resolution plan only to the extent it relates to allocation of payments to the stakeholders and creditors and direct that the revision of payments and subsequent approval of the revised resolution plan should be completed within a period of two months from the date of this judgment. 47. We may also add that the pending applications, namely CA Nos. 235/2018, 236/2018 and 237/2018 and any other application which pertains to recovery of amounts and which could not be properly considered and adjudicated upon, should also be disposed of, preferably in the next two months, and any monies accrued in the kitty of the corporate debtor should be taken as adding to the liquidation value of the corporate debtor and to be utilized for payments to the creditors and stakeholders. 48. With the above-stated directions we dispose of these appeals. The parties shall bear their own costs. - - TaxTMI - TMITax - Insolvency & Bankruptc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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