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TMI Blog2022 (1) TMI 1382X X X X Extracts X X X X X X X X Extracts X X X X ..... ry./2017. 2. The Parties are represented by their original status in the Company Petition for the sake of convenience. Factual Background 3. The Appellant (Union Bank of India) Financial Creditor applied for initiation of Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016 against Corporate Debtor (Amtek Auto Limited). The Adjudicating Authority admitted the petition and appointed Shri Dinkar T. Venkatasubramanian as the Interim Resolution Professional (IRP). 4. Corporation bank, a Financial Creditor of the Corporate Debtor, now known as Union Bank of India, filed an Application, IA No 222/2020, seeking direction for modification of the Approved Resolution Plan of Respondent No. 2 and 3, in compliance with Regulations 42 and 44 of the liquidation Process Regulation 2016 for not deducting Rs. 34 crores from the final payment to be made to the Applicant/Appellant as per the scheme of distribution from out of the amount under the Resolution Plan was rejected. Therefore, feeling aggrieved by the said Order, the present Appeal is filed. 5. Respondent No. 1 is the Resolution Professional of the CD corporate debtor, and Respondents 2 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appeal Paper book. 7.4 In any event, all the payments were made directly to the supplier/vendor /beneficiary of the NFB Facility by debiting the cash credit account of the Corporate Debtor. No amount has been credited towards the loan account of the Corporate Debtor. It is reiterated that the payments were made directly to the vendors, and no amount was appropriated or adjusted by the Appellant towards any outstanding claim under CIRP. Therefore, the Appellant has not done unjust enrichment by alleged recovery of Rs. 33.34 crores from the Corporate Debtor during the CIRP. 7.5 It is also clearly admitted by Respondent No.1 that the NFB Facility has been issued in favour of the beneficiary/vendors for the purchase of various types of steels and other alloys. However, despite this admitted fact, Respondent No.1 failed to appreciate that the Corporate Debtor is liable to pay the suppliers/beneficiaries during the CIRP period. The Appellant did the same by debiting the cash credit account of the Corporate Debtor as instructed by Respondent No. 1. Therefore, the payments consequently made to such beneficiaries by debiting the Corporate Debtor's account are misconceived as recover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is like a contingent liability. Therefore, the amounts were being paid directly to the vendors/suppliers of the Corporate Debtor by the Appellant. 7.11 But Respondent No. 1 misled the CoC by not placing all the facts and records. In particular, his various requests for debiting the current account of Corporate Debtor or issuance of fresh NFB Facility. Furthermore, Respondent No.1 had also misled the CoC by stating that the Appellant had made a recovery of Rs. 34 Crores when the vendors of the Corporate Debtor were the ultimate beneficiaries under the NFB Facility. Therefore, the decision taken by the CoC is based on the incorrect information provided by Respondent No.1. 7.12 The Adjudicating Authority failed to consider that the Appellant, a dissenting Financial Creditor, is entitled to liquidation value according to Section 53 of the IBC. Therefore, it did not comply with Regulations 42 & 44 of the IBC (Liquidation Process) Regulations, 2016. 7.13 The Adjudicating Authority vide its Impugned Order observed that the Appellant has not objected to the said actions of Respondent No.1 in the CoC meetings, contrary to the materials placed before the Adjudicating Authority. Furthermor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal). d) Respondent RP in terms of the duty cast under Section 20 & 25 of the IB Code to continue and maintain the business of the Corporate Debtor as a going concern, requested the Appellant to continue and maintain the NFB Facility limits at the current level as being drawn by the Corporate Debtor prior to the insolvency commencement date. The said request was made on account of the business requirement of the Corporate Debtor. The Corporate Debtor is engaged in manufacturing, fabrication, and engineering automotive parts. As part of its said business, it is required to purchase various types of steel and other alloys. As per the existing market practice, the purchase and procurement of steel and alloys is always backed by Letters of Credit Bank Guarantee issued by the purchaser's Bank in favour of the beneficiary vendor, and thus the continuation of the NFB Facility by the Appellant was very much needed as a lifeline for the continuation of the business of the Corporate Debtor as a going concern. e) That upon the request made by the Answering Respondent/ RP, the Appellant agreed to continue the NFB Facility at an existing level as granted to the Corporate Debtor. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;Financial Institution for any devolvement of Letter of Credit/ Bank Guarantee and made recovery of an aggregate amount of Rs. 33.34 Crores. Monthly details of Letters of Credits (from now on, "LCs") opened by the Appellant against deductions for LCs made from the Corporate Debtor during CIRP are already annexed with the reply of RP. j) This unexpected act on the Appellant led to extreme hardship for the Corporate Debtor to keep up its performance due to this unexpected reduced working capital at hand. More pertinently, the time during which the Appellant took this action was when the Corporate Debtor needed the working capital most due to higher than average sales in the auto sector on account of the festive season. However, the Corporate Debtor could not take advantage of the same due to the unexpected action of the Appellant and lack or non-availability of working capital to procure the raw material on a timely basis. It is also evident from the dip in revenues of the quarter ending 31.12.2018, amounting to approximately INR 261 crores instead of the revenue generated in the quarter ended 31.09.2018. k) That alarmed by such arbitrary act on the part of the Appellant and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t matter. Your continued support in this regard is well appreciated." (verbatim copy) A copy of the Email dated 21.11.2018 and dated 26.11.2018 sent by the Answering Respondent to the Appellant is already attached in Annexure R-1, respectively. n) However, despite having arrived at the understanding with the highest level with the Appellant, the Appellant, without any further communication to the Answering Respondent, arbitrarily and in a high handed manner, withdrew the NFB Facility granted to the Corporate Debtor while making recovery of a further amount of Rs. 33.34 Crores from the collection account of the Corporate Debtor maintained with it during the CIRP by misusing its power as Financial Institution under Section 17(d) of the IB Code contrary to the instructions of the Respondent/RP. o) The Respondent/RP vehemently protested and objected to the withdrawal of the NFB facility by the Appellant vide letter/ email dated 14.12.2018. On account of the illegal and unauthorised recoveries being made by the Appellant and to prevent further loss of working capital, the Answering Respondent was forced to stop the usage of the collection account with the Appellant and use anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said amount from the distribution amount payable to the Appellant under the resolution plan submitted by Respondent No. 2 & 3 in the 30th and 31st meeting of the CoC held on 05.02.2020 and 07.02.2020, respectively. This treatment led to an increase in the Appellant's admitted debt and voting share to 7.72%. A perusal of the minutes above filed by the Appellant (Refer Annexure A-7 at Page 151-161 of the instant Appeal) itself shows that no reservation of any kind was shown or recorded in the said minutes on behalf of the Appellant. s) Respondent further submits that it had no intention to make any harsh statements against the Appellant but was forced to do so. Despite having admittedly made a recovery during the moratorium from the Corporate Debtor, the Appellant still had the audacity to approach the Ld. NCLT by filing the Application being IA. No. 222 of 2020 seeking reliefs against the Respondent/RP for not deducting the illegally recovered amount by the Appellant from the amount to be distributed to it in terms of the resolution plan submitted by the Respondent No. 2 & 3 for approval by the Ld. NCLT. t) The Ld. NCLT, after elaborately hearing the Appellant and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced hereunder for the sake of easy reference of this Hon'ble Appellate Tribunal: "(4) The Committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the Order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board..." Emphasis Supplied v) The Hon'ble Supreme Court in the case of Committee of Creditors of Essar Steel India Limited Through Authorized Signatory Vs. Satish K. Gupta & Ors. [(2019) SCC Online SC 1478] in Para 64 of Judgment and Order has reinforced the said position and has held as under: "Thus, what is left to the majority decision of the Committee of Creditors is the "feasibility and viability" of a resolution plan, which obviously takes into account all aspects of the plan, including the manner of distribution of funds among the various classes of creditors. As an example, take the case of a re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion of Respondent No.1 is that the Non-Fund Based LC/BG doesn't become a Financial Debt due to non-crystallisation. b) On the other hand, Respondent No. 1 submits that when the said LC/BG devolves, the same becomes the obligation of the Appellant. It is further denied that the said un-crystallised amount never became a 'financial debt. It is also explicitly denied that the Corporate Debtor did not receive any material during the CIRP because of the un-crystallised Non-Fund Based Facility. In the case of alleged non-receipt of goods, the same was to be taken up with the supplier of the goods and not the Bank who has issued the LC at the request of Respondent No.1. It is submitted that Respondent No. 1 was actively operating the bank accounts of the Corporate Debtor and was well aware of all financial transactions, including the fact that the NFB Facility falls well within the definition of financial debt under Section 5 (8) (h) of the IBC. c) The Section 5 (8) (h) of the IBC provides the following: "Section 5 (8): "financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes - (h) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is also denied that Respondent No.1 was only acting as the Insolvency Professional, and the management of the Corporate Debtor was vested exclusively with the Monitoring Committee. Further, the Email dated 21.11.2018 referred to the letter dated 30.10.2018 sent by Amtek Auto Limited regarding the Continuance of LC/BG Facilities of Rs. 43 Crores (NFB Limits) in the capacity of the person-in-charge for the management of the Corporate Debtor, and Respondent No. 1 addressed himself as the Insolvency Professional in the said Email dated 21.11.2018. Copy of the Email dated 21.11.2018 has been annexed and marked in the Reply filed by Respondent No.1 as Annexure R-1 (Page 49). g) It is submitted that while honouring the LCs/BGs issued on behalf of the Corporate Debtor, the Appellant being the Financial Creditor, had not unduly enriched itself. It is further reiterated that no amount has been credited towards the loan account of the Corporate Debtor, and the debits are relating to the payment made to the supplier/vendor /beneficiary of LC/BG. Therefore, it is incorrect to say that the appellants have made a recovery of Rs. 33.34 Cr. On the contrary, the said LCs/BGs have been issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NFB limits as proposed will be accepted subject to a cover of an equivalent amount from a scheduled Commercial Bank". Copy of the Letter dated 24.10.2018 is marked and annexed in the Appeal as Annexure A-6 (Page149 to Pg. 150). k) Respondent No. 1 is put to the strict proof on the averment that there has been an unjust enrichment by the Appellant or undue burden on the Corporate Debtor during the already uncertain times, to change the collection account with 43 domestic and international customers. The availing of the LC Letter of credit facility facility during the CIRP period, not considering the same as preferential debt, not- making/objecting for making payment to the supplier under the LC during the CIRP period, and the admission on the part of Respondent No. 1 in shifting the collection account to another Bank, i.e. Axis Bank to avoid payment to the supplier under the LCs from whom the goods have been received during CIRP period, processed and sold to its customer is establishing an act of diversion of the fund and unlawful enrichment of corporate debtor is not paying the goods supplied during the CIRP for the reasons best known to Respondent No. 1 despite acting against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sheet. It is submitted that the Appellant is one of the dissenting Secured Creditors who has been allotted the 'Liquidation value' as per the allocation sheet and, therefore, approved by the CoC. The IRP rejected the claim amount of Rs. 39.61 crores only because the same was not crystallised. o) The observations of the Hon'ble NCLT in the Order dated 09.07.2020 are contrary to records and erroneous to the extent that the Appellant consented to deduction of the amount of Rs. 33.34 crores, and the Appellant nowhere disputed the distribution of amounts payable to the Appellant being a dissenting creditor under the terms of the Resolution Plan of Respondent No. 2 and 3. The Appellant raised objections against the rejection of Rs. 34 Crores by the IRP in the 31st CoC meeting and the Email dated 20.02.2020 as mentioned in the preceding paragraphs. 10. ANALYSIS 10.1 Admittedly IA 222/2020 was filed u/s 60 (5) of the IB Code before the Adjudicating Authority to modify the Resolution Plan, which the Committee of Creditors approved with more than the required percentage, i.e. 70.07% of vote share, wherein the Appellant was also a member. However, it dissented with the said a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject to the provisions of Section 53, the liquidator shall not commence distribution before the list of stakeholders and the asset memorandum has been filed with the Adjudicating Authority. (2) The liquidator shall distribute the proceeds from realisation within [ninety days] from the receipt of the amount to the stakeholders. (3) The insolvency resolution process costs, if any, and the liquidation costs shall be deducted before such distribution is made. 44. Completion of liquidation.- [(1) The liquidator shall liquidate the corporate debtor within a period of one year from the liquidation commencement date, notwithstanding pendency of any application for avoidance of transactions under [* * *] Part II of the Code, before the Adjudicating Authority or any action thereof: Provided that where the sale is attempted under sub-regulation (1) of Regulation 32-A, the liquidation process may take an additional period up to ninety days.] (2) If the liquidator fails to liquidate the corporate debtor within [one year], he shall make an application to the Adjudicating Authority to continue such liquidation, along with a report explaining why the liquidation has not been comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and (ii) the term "workmen's dues" shall have the same meaning as assigned to it in Section 326 of the Companies Act, 2013 (18 of 2013). 10.6 In the case of Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657: (2021) 4 SCC (Civ) 638: 2021 SCC OnLine SC 313 at page 698 Hon'ble Supreme Court has held; 65. Bare reading of Section 31 of the I&B Code would also make it abundantly clear that once the resolution plan is approved by the Adjudicating Authority, after it is satisfied, that the resolution plan as approved by CoC meets the requirements as referred to in sub-section (2) of Section 30, it shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders. Such a provision is necessitated since one of the dominant purposes of the I&B Code is revival of the corporate debtor and to make it a running concern. 66. The resolution plan submitted by the successful resolution applicant is required to contain various provisions viz. provision for payment of insolvency reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de an on-going concern. After CoC approves the plan, the adjudicating authority is required to arrive at a subjective satisfaction that the plan conforms to the requirements as are provided in sub-section (2) of Section 30 of the I&B Code. Only thereafter, the adjudicating authority can grant its approval to the plan. It is at this stage that the plan becomes binding on the corporate debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. The legislative intent behind this is to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that is permitted, the very calculations on the basis of which the resolution applicant submits its plans would go haywire and the plan would be unworkable. 102.1. That once a resolution plan is duly approved by the adjudicating authority under sub-section (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continue and sustain the Non-Fund-Based Facility NBF Facility limits at the existing level at being drawn by the Corporate Debtor prior to the insolvency commencement date. The said request was made on account of the business requirement of the Corporate Debtor. The RP further stated that the Corporate Debtor is engaged in the manufacturing, fabrication, and engineering automotive parts. As part of its business, it must purchase various steel and other alloys. As per the existing market practice, the purchase and procurement of steel and alloys are always backed by a Letter of Credit Bank Guarantee issued by the purchaser's Bank in favour of the beneficiary vendor, and thus the continuation of the NBF Facility by the Appellant was very much needed as a lifeline for the continuation of the business of the Corporate Debtor as a going concern. 10.10 After the above statement of the RP in its Reply, it is clear that based on the instructions of the RP given maintaining the business of corporate debtor as a going concern, the continuation of the non-fund-based facility by the Appellant in terms of the letter of credit bank guarantee issued by the appellant bank in favour of the ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as interim finance or not. 10.16 It is further made clear that Payment of CIRP cost in priority to other debts is mandatory u/s 53(1) of the Code. Therefore, given Section 30 (4) of the IB Code, COC is empowered to fix the Order of priority amongst creditors as laid down under Section 53 (1). However, permissibility about the deduction of CIRP cost from the amount allotted under the approved Resolution Plan is not covered under Section 30 (4) of the Code. 10.17 In the instant case, Resolution Professional has admitted that it had suggested the COC two options, to either treat the recovery made by the Appellant as interim finance under IB code or deduct the amount illegally recovered by the Appellant, out of distribution amount payable to the Appellant under the Resolution Plan. Thus, it is clear that RP failed to exercise its jurisdiction to decide the issue of CIRP cost and left it to the CoC to decide whether the amount incurred in keeping the Corporate Debtor as a going concern, by the continuation of letter of credit bank guarantee facility during the CIRP would be treated as interim finance. However, it was the duty of IRP/RP itself to decide the CIRP cost. After that, ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-compliance with such instructions of RP can not be considered a violation of Section 17 (1) (d) of the Code. 10.21 The learned Counsel for the Respondent RP emphasised that Section 30 (4) of the IBC cast a role to supervise distribution amongst all creditors on the COC, and the IRP had no say in that. 10.22 Section 30(4) of IB Code provides that "the committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent of voting share of the financial creditors, after considering its feasibility and viability the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of Section 53, including the priority and value of the security interest of a secured creditor, and such other requirements as may be specified by the Board" 10.23 Given section 30 (4) of the IB Code, it is clear that the Committee of Creditors may approve a resolution plan with 66% voting share after considering its feasibility and viability. The manner of distribution proposed may take into account the Order of priority amongst creditors as laid down under Section 53 (1) of the Code. But for fixing the Orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c 53(1) of the IBC mandates the priority of payment for the Insolvency Resolution Process Cost and the Liquidation costs. However, in the instant case, IRP/RP firstly insisted the Appellant Bank continue Letter of Credit Bank Guarantee Facility during CIRP at the current level to keep the Corporate Debtor as a going concern. But after that, RP made an erroneous recommendation to the CoC to either consider payment against LC/BG as CIRP Cost or deduct that amount from out of the amount allotted to the Appellant's share under the Approved Resolution Plan. 10.29 Based on the above, it is clear that the Appellant never recovered any amount from the payment of Rs. 34 crores, as has been misrepresented by Respondent No. 1. The Adjudicating Authority vide its impugned Order observed that the Appellant has not objected to the said actions of Respondent No. 1 in the COC meetings is contrary to the materials placed before the Adjudicating Authority. Furthermore, the Appellant had refuted the actions of respondent No. 1 vide its Email dated 20 February 2020, which the Adjudicating Authority has overlooked. Therefore, the Adjudicating Authority has misconstrued the payment made to the Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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