Harkirat Singh Bedi Vs. The Oriental Bank of Commerce & Anr. - Rejection/Approval of Resolution Plan is commercial decision of CoC & is non-justiciable

NCLAT (12.01.2021) in  Harkirat Singh Bedi Vs. The Oriental Bank of Commerce & Anr. [Company Appeal (AT) (Ins.) No. 40 of 2020]  held that; 

• From the abovementioned landmark case it can be concluded that a limited judicial review is available in respect of an approved resolution plan. The grounds under Section 30(2) or 61(3) of the IBC are regarding testing the validity of the approved resolution plan by COC and not for approving the resolution plan which has been disapproved by the COC in exercise of its business decision.

• Also, the date of registration of the Corporate Debtor as MSME as on record was 5th June, 2019, i.e. after CIRP admission order dated 29th March, 2019. The application for registration of MSME by the Appellant was without authorization, being subsequent to initiation of CIRP and hence was invalid. Therefore, the Appellant is ineligible to take the benefits of section 240A under I&B Code

Excerpts of the order;

1. The present appeal has been preferred by Mr. Harkirat Singh Bedi (hereinafter referred to as ‘Appellant’). He was an Erstwhile promoter of M/s IDEB Projects Private Limited (hereinafter referred to as ‘Corporate Debtor’). The Appeal is preferred under section 61 of the Insolvency and Bankruptcy Code (hereinafter referred to as ‘I&B Code’) challenging the impugned order dated 8th November, 2019 passed by National Company Law Tribunal, Bangaluru Bench (hereinafter referred as ‘Adjudicating Authority’) in Company Petition No. C.P. (IB) No. 17/BB/2019. In the impugned order Adjudicating Authority have passed the order for liquidation of the Corporate Debtor.

2. The Adjudicating Authority while passing the impugned order dated 8th November, 2019 observed in para 7 and as follows:

• “….In this regard, it is to be mentioned here that the Resolution Plan submitted by Mr. H.S Bedi is dated 16.09.2019, whereas Section 29A of the code was inserted by Insolvency and Bankruptcy Code (Amendment) Act, 2018 w.e.f. 23.11.2017, whereas it is inter-alia declared that a person shall not be eligible to submit a resolution plan, if such person acting jointly or in concert with such person is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under Banking Regulation Act, 1949.

• Therefore, Section 29A will be applicable to the instant case and thus the rejection of the Resolution Plan of Mr. H.S. Bedi by the COC is not in contravention of the provisions of the Code. However, this order will not preclude Mr. H.S. Bedi to approach the Hon’ble High Court of Karnataka in pending Writ Petition, by seeking appropriate directions in this matter.”

Consequently, admitted the application and ordered the liquidation of the Corporate Debtor by appointing Shri Velayudham Jayavel as Liquidator and issued other consequential directions.

6. Thereafter, COC upon perusal of the said order, unanimously agreed to allow the Appellant to submit his resolution plan. After deliberating and discussing the resolution plan, the COC in its meeting rejected the resolution plan of the Appellant on the following grounds:

• a) The Appellant is declared as a willful defaulter by SBI, State Bank of Travancore and Oriental bank of Commerce and the same is visible in CIBIL database.

• b) The resolution plan was not in compliance with the IBC.

• c) The Appellant did not file affidavit under regulation 39 of the code regarding eligibility of the Appellant under section 29A of the IBC.

• d) Further, the Appellant had also failed to provide undertaking under regulation 38 of the IBC for payment to Operational Creditors.

• e) Appellant also failed to provide undertaking that all the information which Appellant had provided with his resolution plan are true and accurate.

7. In view of the above, the COC decided to liquidate the Corporate Debtor as per the provisions of Section 33(2) of the IBC, with 92.63% of the COC members voting in favor of the same and thereafter, the CIRP period expired on 25th September, 2019. Thereafter, the Adjudicating Authority vide its order dated 8th November, 2019 confirmed the Corporate Debtor is to be liquidated in terms of the liquidation process given under I&B Code and further appointed Respondent No. 2 as liquidator of the Corporate Debtor.

25. The learned counsel for Respondent No. 2 submitted that EOI in Form G was published by RP on 16th June, 2019, in pursuance of which, the Appellant submitted its EOI on 28th June, 2019 claiming exemption of section 29A (c) & (h) read with section 240A declaring that the Corporate Debtor is a registered MSME. Appellant’s EOI was rejected by RP on 26th July, 2019 on the ground that the Appellant had been declared as ‘willful defaulter’ and his name appears as such on the CIBIL’s database. Hence, he was not eligible to be a resolution applicant as per section 29A(b) of I&B Code. It was also informed that the registration of the Corporate Debtor as MSME was obtained by the Appellant on 5th June, 2019, i.e. after CIRP admission order dated 29th March, 2019. The application for registration of MSME by the Appellant was without authorization, being subsequent to initiation of CIRP and hence was invalid. The Appellant had no authority to act on behalf of the Corporate Debtor after the initiation of CIRP, as the management & affairs of the Corporate Debtor are in the hands of the appointed IRP/RP (Innoventive Industries vs. ICICI Bank, (2018) 1 SCC 407, para 10-11). Further, even if the Corporate Debtor was validly registered as an “MSME”, the exemption under section 240A would not be applicable to the present case as, pursuant to section 240A, resolution applicants are exempt only from the provisions of section 29A(c) and 29A(h).

28. The learned counsel for the Respondent No. 2 also contended that the present appeal is not maintainable on the ground that the legislature has not provided any ground for the resolution applicant to challenge the “commercial wisdom” of the COC in rejecting a resolution plan. Under section 31 of the I&B Code, the Adjudicating Authority can only examine an ‘approved’ resolution plan on limited parameters, and not a ‘rejected’ resolution plan is not amicable to challenge before the Adjudicating Authority or before this Appellate Tribunal. The commercial wisdom of the COC in accepting or rejecting a resolution plan is “non-justiciable”. (K. Sashidhar v. Indian Overseas bank & Ors., (2019) 12 SCC 150 para 52, 55, 56). Reliance Emphasized.

29. The learned counsel for the Respondent No. 2 further contended that COC applied its commercial wisdom and rejected for extension of time for CIRP. In the present case, the COC having declined to extend the statutory period, the only consequence is that the Corporate Debtor must go into liquidation, as provided by the impugned order.

32. The learned counsel for the Respondent No. 3 has put his reliance on the leading case of Chitra Sharma v. Union of India, (2018) 18 SCC 575. The extract of the case is reproduced as below: 

• “38. Parliament has introduced Section 29 A into the IBC with a specific purpose. The provisions of Section 29 A are intended to ensure that among others, persons responsible for insolvency of the corporate debtor do not participate in the resolution process….” 

• “39. ......the Court must bear in mind that Section 29 A has been enacted in the larger public interest and to facilitate effective corporate governance. Parliament rectified a loophole in the Act which allowed a back-door entry to erstwhile managements in the CIRP. Section 30 of the IBC, as amended, also clarifies that a resolution plan of a person who is ineligible under Section 29 A will not be considered by the COC……”

34. At this point, this tribunal worth recalls and recollects the decision of Hon’ble Supreme Court in the case of K. Sashidhar v. Indian Overseas Bank & Ors, Civil Appeal No. 10673 of 2018 wherein it is observed as under:

• “33. As aforesaid, upon receipt of a “rejected” resolution plan the adjudicating authority (NCLT) is not expected to do anything more; but is obligated to initiate liquidation process under Section 33(1) of the I&B Code. The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC muchless to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. From the legislative history and the background in which the I&B Code has been enacted, it is noticed that a completely new approach has been adopted for speeding up the recovery of the debt due from the defaulting companies. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory. In the earlier regime, the corporate debtor could indefinitely continue to enjoy the protection given under Section 22 of Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. Besides, the commercial wisdom of the CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I&B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject matter expressed by them after due deliberations in the CoC meetings through voting, as per voting shares, is a collective business decision. The legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority. That is made nonjusticiable.”

35. From the abovementioned landmark case it can be concluded that a limited judicial review is available in respect of an approved resolution plan. The grounds under Section 30(2) or 61(3) of the IBC are regarding testing the validity of the approved resolution plan by COC and not for approving the resolution plan which has been disapproved by the COC in exercise of its business decision.

39. The appellant in its EOI claimed the advantage of section 240A of the code claiming exemptions from applicability of section 29A(c) and 29A(h) in terms of eligibility to be a resolution applicant as a medium level enterprise under MSME Development Act, 2006. On reading the provisions under section 29A along with section 240A of I&B Code. It can be concluded that the exemption is only in respect of clause (c) and (h) of Section 29A of the I&B Code. However, in this case the Appellant is declared ineligible under clause (b) of Section 29A where no exemption has been given to MSME. Also, the date of registration of the Corporate Debtor as MSME as on record was 5th June, 2019, i.e. after CIRP admission order dated 29th March, 2019. The application for registration of MSME by the Appellant was without authorization, being subsequent to initiation of CIRP and hence was invalid. Therefore, the Appellant is ineligible to take the benefits of section 240A under I&B Code.

41. In view of the foregoing discussions this Tribunal finds no legal infirmity in the Impugned Order of the Adjudicating Authority. Appeal is therefore dismissed for the reason accredited by this tribunal. There shall no order as to costs.

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