Monday 15 February 2021

Arun Kumar Sinha Vs. M/s. Three C Homes Pvt. Ltd - Resolution Plan fails to demonstrate that it addresses the 'cause of default', hence rejected.

NCLT New Delhi-III (08.02.2021) in Arun Kumar Sinha Vs. M/S. Three C Homes Pvt. Ltd  [CA No. 3840/ 2020 in IB-432/ND/2019] held that; 

  • While dealing with fourth objection i.e. the resolution plan is in violation of Regulation 38(3) (a) of the CIRP Regulations, as it fails to demonstrate that addresses the 'cause of default'

  • Therefore, the proposal given by the RA in the Resolution Plan is unilateral and does not appear to address the issue properly. In view of it, the fourth objection of the Applicants/Financial Creditor in class is held to be sustainable. 

  • In the light of the discussion made above, the CA No. 3840/2020 is allowed. Resultantly, the Resolution Plan submitted for approval of this Authority does not merit consideration and stands rejected,


Excerpts of the order;

# 1. Under consideration is CA No. 3840/2020 filed by the Applicants i.e., Financial  Creditors in Class (Home buyers/Allottees) under section 60(5) of IBC, 2016  wherein inter alia objections have been raised with respect to the Resolution plan filed by Resolution Professional through 1.A. No. 3385/2020. Both the CA No.  3840/2020 and I.A. No. 3385/2020 are interconnected. Therefore, applications are  tagged to pass a common order. 


# 2. The first objection raised by the Applicants is that the Resolution plan is in violation  of Section 30(2).(b) of IBC, 2016, as there is no provision regarding the payments  to the dissenting financial Creditors as required under IBC, 2016. However, the  resolution professional declared to the CoC that the resolution plan received from  M/s. Ace Infracity Developers Private Limited, is found to be compliant in terms of  the provisions of section 30 (2) of IBC, 2016. 


# 3. While quoting the Report of the Insolvency Law Committee dated 26th March, 2018,  it is submitted by the Applicants that by virtue of the explanation to Section 5(8) (f)  and the categorisation of homebuyers as financial creditors, they will fall within the  relevant entry in the liquidation waterfall under section 53. 


# 4. The second objection raised by the Applicants is that RP vide email dated 8th  August, 2020 informed that the liquidation value of the Corporate Debtor is Rs. 480.70 Crores, however, the resolution plan offers Rs. 180.34 crores only, out of  which Rs. 85 crores are sought to be collected from the Allottees itself. Hence,  against a claimed infusion of funds of Rs. 95 Crores (approx.) over a period of Two  years, the resolution applicant proposes to acquire the corporate debtor, which is  only 1/51h of the Liquidation value of Corporate debtor. 


# 5. The third Objection raised by the applicants is that the approval of the Resolution  Plan by the CoC is not in compliance of the provisions of the Code and the CIRP  Regulations (Fourth Amendment), 2020, which came into force on 07.08.2020. 


# 6. The fourth Objection is that the resolution plan is in violation of Regulation 38(3) (a)  of the CIRP Regulations, as it fails to demonstrate that addresses the 'cause of  default. It is stated that Clause 5.1 of the resolution plan records the 'cause of  default being Yamuna Expressway Industrial Development Authority's (YEIDA)  dispute with farmers and resulting in delay in delivery of plot of project “Lotus City"  and flats of project “Parkspace". The Resolution Plan records that the farmers are  creating law and order problem and did not allow the corporate debtor to develop  the site. YEIDA and police authority failed to support the CD. YEIDA has raised  demand to pay Rs, 71,66,03,1921-. It is further stated that Resolution Plan's assumption that the farmers will forego their claim of Rs 71.66 Crores in exchange  of the resolution applicant's promise to spend a sum to develop the adjoining  village Salarpur, is amateurish, to say the least. 


# 7. The Resolution Applicant i.e., the Respondent No.3 has submitted detailed reply  to the application under consideration. With respect to the first objection i.e., no  provision is made in the Resolution Plan for the payments to the dissenting  financial Creditors in Class. It is submitted that the IBC, 2016 has not provided for a  mechanism whereby creditors within a Class can be entitled to the guaranteed  sums under section 30(2)(b) under the heading of dissenting financial creditors, as  the scheme of voting for creditors in a class makes it clear beyond any doubt that  these creditors would not be treated as creditors who did not vote in favour of the  resolution plan. The individual vote of such creditor is not taken into account while  deciding the final stance of the entire class, and therefore, the final vote represents  the vote of each and every member of the class. The answering respondent also  quoted the operative part of the Insolvency Law Committee Report of 2018 (ILC  Report '18) and further submitted that it is clear from the ILC Report '18 that the vote of the Authorized Representative is for the entire class of creditors and taken as a vote for each and every creditor as the Authorized Representative votes on  behalf of each and every creditor. 


# 8. The answering respondent also relied on the judgment of Hon'ble Supreme Court given in the matter of Pioneer Urban Land & Infrastructure Limited v. Union of India (2019) 8 SCC 416. The operative part of the judgment is reproduced as follows; - "Given the fact that allottees may not be a homogenous group, yet there are only two ways in which they can vote on the Committee of Creditors — either to approve or to disapprove of a proposed resolution plan. Sub-section (3A) goes a long way to ironing out any creases that may have been felt in the working of Section 25A in that the authorised representative now casts his vote on behalf of all financial creditors that he represents. If a decision taken by a vote of more than 50% of the voting share of the financial creditors that he represents is that a particular plan be either accepted or rejected, it is clear that the minority of those who vote, and all others, will now be bound by this decision." 


# 9. The answering respondent also filed an affidavit dated 02.12.2020 in compliance of the order dated 25.11.2020 of this Authority, where it was declared that for the allottees in the Project 'Park Space' the Resolution Applicant shall, based on the claims collated and admitted by the Resolution Professional during the corporate insolvency process, would refund the principal amount paid by the allottees as per the schedule of implementation under the Resolution Plan. 


# 10. It is further declared by the answering respondent in the affidavit that the resolution applicant agreed that for the allottees in the project 'Lotus City' who have genuine reasons and want to seek refund of the amount paid by them instead of the possession of the plot, the cases of such allottees shall be considered on a case to-case basis by the monitoring agency/Resolution Applicant and such refund, if any, shall be payable as per the schedule enumerated in the Resolution Plan. It is also declared that possession shall be delivered to the allottees subject to receipt of pending payments from the allottees. 


# 11. It is further averred that the Applicants are allottees in the Lotus City-1 and are therefore, would be provided possession of the allotted units along with additional benefits. Based on this, it is contended that the resolution plan is in conformity of section 30(2)(b) of IBC, 2016, as it has not only followed the principal of 'fair and equitable' treatment to be given to the creditors in a class, but has in fact provided for equal treatment to all the creditors in a class, without any form of differentiation/discrimination. The reasoning given by the answering Respondent appears to be plausible. Therefore, first objection stands rejected. 


# 12. While answering the second objection, which relates to the huge difference between the liquidation value and the offer made by the Resolution Applicant, it is submitted by the answering respondent that it is legally unsustainable, since it has no statutory backing either under the code or the applicable regulations. The respondent also relied on the judgment of Hon'ble Apex Court namely, Maharashtra Seamless Limited Vs. Padambhan Venkatesh & Ors. [2020 SCC Online SC 67], the operative part of the judgment is as follow: - 

  • “26. No provision in the Code or Regulations has been brought to our notice under which the bid of anti-Resolution Applicant has to match liquidation value arrived at in the manner provided in Clause 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. This point has been dealt with in the case of Essar Steel (supra). 

  • 27. It appears that the object behind prescribing such valuation process is to assist the CoC to take decision on a resolution plan properly. Once, a resolution plan is approved by the CoC, the statutory mandate on the Adjudicating Authority under Section 31(1) of the Code is to ascertain that a resolution plan meets the requirement of sub-sections (2) and (4) of Section 30 thereof. There is no breach of the said provisions if the resolution plan is approved by the Adjudicating Authority." 


# 13. It is correct to state that the aforesaid proposition is also reiterated by the Hon'ble Supreme Court in State Bank of India v. Accord Life Spec. (P.) Ltd., 2020 SCC Online SC 554. Nevertheless, this objection needs to be examined meticulously, as its impact is visible on the viability and suitability of the Resolution Plan. 


# 14. It is worthwhile to record that the Liquidation Value for the Corporate Debtor is Rs. 480.70 crores, against which the Resolution Plan approved by CoC provides for an amount of Rs. 180.34 crores. Even, against Rs. 180.34 crores, the Successful Resolution Applicant is obliged to bring in only amount of Rs. 95 crores by way of fresh infusion of fund, which is also spread over a period of 2 years and the rest of Rs. 85 crores are to be contributed by Financial Creditors i.e., the Home Buyers. Effectively, the Successful Resolution Applicant is taking away Corporate Debtor for a meagre sum of Rs. 95 crores. The huge difference between Liquidation Value and amount of fresh funds infusion in percentage terms is to the extent of (-) 80.23 %. In other words, the Successful Resolution Applicant is taking away the Corporate Debtor for a meagre sum of Rs. 95 crores, which is just at 19.77 % of the Liquidation Value of Corporate Debtor. This treatment of Home Buyers as Financial Creditors in the Resolution Plan seems to be totally inequitable, unjust and highly objectionable as the successful Resolution Applicant is taking away the Corporate Debtor at a value which is nothing but just a pittance. 


# 15. Therefore, the decision of Hon'ble Supreme Court rendered in the case of Maharashtra Seamless Ltd. Vs. Padmanabhan Venkatesh, which is being relied upon by the answering Respondent does not come to the rescue of the Resolution Applicant, because the judgment does not seem to cover the facts and circumstances of the case on hand due to the reasons as follows: - 

  • (i) The creditor in Maharashtra Seamless Ltd.'s case supra was normal Financial Creditor i.e., Indian Bank and no Home Buyers were involved, whereas the Financial Creditors in present petition are Home Buyers, a category in Class. 

  • (ii) In the said case, basic issue arose before Hon'ble Supreme Court stemmed out of the fact that in the said matter, the Successful Resolution Applicant was asked to pay an additional amount of Rs. 120.54 crores over and above upfront payment of Rs. 477 crores to financial creditors therein as against Liquidation Value of Rs. 597.54 crores. In other words, the upfront amount in comparison to Liquidation Value was shorter by around 20 per cent only. 

In view of the reasons mentioned above, we are unable to persuade ourselves that the Resolution Plane has any potential to fulfil the dream of the homebuyers, which is just at 19.77 % of the Liquidation Value of Corporate Debtor. Therefore, the second objection is well taken by the applicant/Home buyers and deserves to be upheld. 


# 16. While dealing with the third objection i.e., the Resolution Plan is not in compliance of the provisions of the Code and the CIRP Regulations (Fourth Amendment), 2020, which came into force on 07.08.2020, it is submitted by the answering respondent that vide Amendment 2020 made in CIRP Regulations, the voting mechanism for the class of creditors was on the agenda items by amending regulation 16A (9) of the CIRP Regulations, 2016. It is further submitted that a notice dated 05.08.2020 was already issued to convene the 5th COC Meeting on 10.08.2020, for which voting by the allottees u/s 25A of the IBC was scheduled for 08.08.2020. The amendment was introduced only on 07.08.2020, after the notice for the CoC meeting was already issued on 05.08.2020. The respondent further added that it is cardinal principle of law that every statute or amendments is to apply prospectively, unless it is expressly or by necessary implication made to have retrospective effect and there is no such mention in the CIRP Regulations' Amendment, 2020 dated 07.08.2020. 


# 17. For the purpose of easy reference, the original and amended provisions of the regulation are given in the tabular form as follows; 


Original Provision

Amended Provision

(9) "The authorised representative shall circulate the agenda to creditors in a class and announce the voting window at least twenty-four hours before the window opens for voting instructions and voting window open for at least twelve hours." 

(9) “The authorised representative shall circulate the agenda to creditors in a class, and may seek their preliminary views on any item in the agenda to enable him to effectively participate in the meeting of the committee.

Provided that creditors shall have a time window of at least twelve hours to submit their preliminary views, and the said window opens at least twenty-four hours after the authorised representative seeks preliminary views: 

Provided further that such preliminary views shall not be considered as voting instructions by the creditors." 


On careful examination of the amended regulation, it becomes clear that the same relates to the 

procedure. The amendment in procedural law has always retrospective effect, unless there is specific provision barring its retrospective operation, this is the general rule of interpretation. ……………

From the details noted above, it can be seen that amended regulation came into force on 07.08.2020, thereafter three meeting of the COC were conducted i.e., on  08.08.2020, 09.08.2020 and 10.08.2020, but even then the amended procedure  has not been followed while approving the Resolution Plan. Therefore, there is no effective participation of the Authorised Representative of the home buyers in the voting process conducted for approval of the Resolution Plan. Thus, the arguments advanced by the answering respondent are not plausible. The third objection raised by the Applicants/Home Buyers merits consideration and is upheld. 


# 18. While dealing with fourth objection i.e. the resolution plan is in violation of Regulation 38(3) (a) of the CIRP Regulations, as it fails to demonstrate that addresses the 'cause of default'. It is submitted that the plan has also identified the 'cause of default' of the Corporate Debtor as required under regulation 38 of the CIRP regulations. For the purpose of resolving the said cause of default, a provision has been made to develop the adjoining village 'Salarpur' and also develop the community facilities in consultation with YEIDA and local panchayat by investing a sum of INR 15 crores for such development to satisfy the farmers. 


# 19. In connection with the objection mentioned above, it is noted that the Resolution Plan records that the farmers are creating law and order problem and did not allow the corporate debtor to develop the site. YEIDA and police authority failed to support the CD. YEIDA has raised demand to pay Rs, 71,66,03,192/-. These issues have not been addressed in the Resolution Plan and it is correct to state that the farmers will not forego their claim of Rs, 71.66 Crores in exchange of the resolution applicant's promise to spend a sum to develop the adjoining village Salarpur. Therefore, the proposal given by the RA in the Resolution Plan is unilateral and does not appear to address the issue properly. In view of it, the fourth objection of the Applicants/Financial Creditor in class is held to be sustainable. 


# 20. In the light of the discussion made above, the CA No. 3840/2020 is allowed. Resultantly, the Resolution Plan submitted for approval of this Authority does not merit consideration and stands rejected, Therefore the I.A. No. 3385/2020 is dismissed. In the circumstances, the only course open to this Authority is to direct the RP to file appropriate application immediately for seeking liquidation order of the CD namely, M/S THREE C HOMES PVT. LTD. 


# 21. The order is pronounced through video conferencing. 


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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.