NCLAT (02.03.2021) in Committee of Creditors of EMCO Limited Vs Mrs. Mary Mody & Sundaresh Bhat, Resolution Professional of EMCO Limited [COMPANY APPEAL (AT) (Insolvency) No. 307 of 2020] held that;
Keeping in view all the aforenoted reasons and the ratio of the Hon’ble Supreme Court in ‘K. Sashidhar’ (Supra) that the commercial or business decision of the CoC is non-justiciable, and at best, the Adjudicating Authority may cause an enquiry on limited grounds, and does not have Jurisdiction to undertake scrutiny of the justness of the opinion expressed by the CoC when it has voted by a majority share, we are of the opinion that this ratio is applicable to the facts of this case as the CoC has by a majority vote rejected to raise any ‘Interim Funds’ and the Adjudicating Authority cannot direct the CoC to do the same. Hence, we hold that the direction given by the Adjudicating Authority in MA 4002/2019 are contrary to the provisions of IBC and are hereby set aside.
Excerpts of the order;
# 1. The present Appeal, by the Committee of Creditors is filed under Section 61 of the Insolvency and Bankruptcy Code 2016 (in short the ‘IBC’) against the Impugned Order dated 15.01.2020, passed by the Learned Adjudicating Authority (National Company Law Tribunal, Mumbai Bench, in MA 4002/2019 in CP (IB) No. 2849/MB/2018, whereby the Learned Adjudicating Authority, vide the Impugned Order has directed the Committee of Creditors of the Corporate Debtor Company, namely EMCO Limited, to provide interim funds to the Resolution Professional to run during the CIRP period; to provide funds to meet the expenditure already incurred to the tune of Rs. 2.21 Crores till December 2019 and further directed the CoC to submit the compliance report at the time of next hearing.
# 3. Learned Counsel appearing for the Appellant/CoC contended that the directions issued by the Learned Adjudicating Authority were contrary to the provisions of the IBC; for Section 5(13) of the Code defines ‘Insolvency Resolution Professional Costs’ and any ‘Interim Finance’ raised should confirm to the same and also placed reliance on Section 5(15) which defines ‘Interim Finance’, Section 25 which deals with dues of ‘Resolution Professional’ and Section 25(2)(c) which provides that the Resolution Professional shall undertake to raise ‘Interim Finance’ subject to approval of the Committee of Creditors under Section 28.
# 4. The Learned Counsel argued that as per Section 28(3) of the Code approval of the CoC by a vote of 66 % of the voting share is required to raise any Interim Funds and as the Appellant has not granted any such approval and the decision of the CoC is non-justiciable as laid down by the Hon’ble Supreme Court in several Judgements, no direction to provide Interim Finance ought to have been passed by the Learned Adjudicating Authority.
# 5. Learned Counsel appearing for the CoC, further submitted that the said direction was passed without hearing the Appellant and in a proceeding whether the Appellant was not even made a party.
# 6. The Learned Counsel drew our attention to the Minutes of the 6th CoC Meeting dated 08.01.2020 wherein it was recorded by the CoC Members that EMCO Ltd. was not a going concern and therefore ‘it was viable at the stage to confirm the unpaid salary and wages to all the employees and the workmen as the CIRP cost which would be required to be borne by successful Resolution Applicant and paid within 30 days of the approval of the Resolution Plan as per the provisions of the IB Code’. It is further submitted that as per Section 30(2)(a) of the Code, if the Resolution Plan is approved such a Plan would provide for the payment of the ‘Insolvency Resolution Process Cost’ in a manner specified by the Board in priority to the payment of other debts and in case no Resolution Plan is approved and an Order of liquidation is passed, the ‘Costs’ are paid as per Section 53 of the Code. In the present case no Resolution Plan is approved and the CoC has voted for liquidation and an Application seeking liquidation has already been filed before the Adjudicating Authority which is pending. It is submitted that as
the Corporate Debtor is non-operational only salaries of those employees which the Resolution Professional has retained to keep the CIRP going, at reduced salaries, was paid and hence the directions of the Learned Adjudicating Authority to the Appellant to raise Interim Finance and pay the amounts is erroneous.
# 7. Per contra, the Learned Counsel appearing for the 1st Respondent/ the Applicant in MA 4002/2019 contended that as on the date of CIRP i.e. 16.08.2019, the Corporate Debtor had work orders amounting to Rs. 307/- Crores; that the said work orders could not be completed owing to the failure of the CoC to raise Interim Finance despite requests made by the Resolution Professional; that the services of the Respondent employees were not terminated; that even though approval of CoC is required for raising any Interim Finance, however, the approval of CoC is not required for payment of salaries to the workmen of the Corporate Debtor for the period of CIRP.
# 12. Heard both the Parties at length. The main point which falls for consideration here is whether the Corporate Debtor was a going concern and whether the Learned Adjudicating Authority was justified in directing the CoC to raise interim funds and provide to the RP to run the CIRP period and to meet the expenditure incurred till December 2019 to the tune of Rs. 2.21/- Crores.
# 14. It is an admitted fact that the CIRP proceedings began on 16.08.2019 and the Resolution Professional was confirmed on 14.10.2019. In the Reply filed by the RP to the MA all facts with respect to the salaries of 51 employees were placed on record till 31.08.2019. It is stated in the Reply that any salary dues prior to the commencement of CIRP process will be considered by the Resolution Applicant, whose Resolution Plan, if any, shall be approved by the CoC Members. It is also an admitted fact that the said employees have also filed a Claim with the RP.
# 15. It is pertinent to mention that the Resolution Professional in para 18 of the Additional Affidavit in Reply has clearly deposed that the ‘Corporate Debtor was non-operational and not a going concern’.
# 20. Section 5(13) of the Code defines Insolvency Resolution Professional process cost as follows;
“5(13). Insolvency Resolution Process cost means-
(a) the amount of any Interim Finance and the costs incurred in raising such finance;
(b) the fees payable to any person acting as a resolution professional;
(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern;
(d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and
(e) any other costs as may be specified by the Board.”
# 21. Section 5 (15) of the Code defines Interim Finance;
“5 (15). Interim Finance means any financial debt raised by the resolution professional during the insolvency resolution process period.”
# 22. Section 28 (1) refers to approval of Committee of Creditors for certain actions. Section 28(1)(a), Section 28(3) and Section 28(4) read as follows;
“28. Approval of committee of creditors for certain actions.-
(1) Notwithstanding anything contained in any other law for the time being in force, the resolution professional, during the corporate insolvency resolution process, shall not take any of the following actions without the prior approval of the committee of creditors namely;-
(a) raise any Interim Finance in excess of the amount as may be decided by the committee of creditors in their meaning….”
“28(3) No action under sub-section (1) shall be approved by the committee of creditors unless approved by a vote of sixty-six percent of the voting shares.”
“28(4) Where any action under sub-section (1) is taken by the resolution professional without seeking the approval of the committee of creditors in the manner as required in this section, such action shall be void.”
It is clear from the aforenoted Sections that the Resolution Professional can raise Interim Finance only subject to approval of the Committee of Creditors by a vote of 66 % under Section 28. In the instant case it is an admitted fact that the CoC have not approved the raising of any interim funds.
# 23. At this juncture, we find it relevant to rely on the principle laid down by the Hon’ble Supreme Court in ‘K. Sashidhar’ V/s ‘Indian Overseas Bank’ (2019) 12 SCC 150;
“44. Suffice it to observe that in the I&B Code and the Regulations framed thereunder as applicable in October 2017, there was no need for the dissenting financial creditors to record reasons for disapproving or rejecting a resolution plan. Further, as aforementioned, there is no provision in the I&B Code which empowers the adjudicating authority (NCLT) to oversee the justness of the approach of the dissenting financial creditors in rejecting the proposed resolution plan or to engage in judicial review thereof. Concededly, the inquiry by the resolution professional precedes the consideration of the resolution plan by the CoC. The resolution professional is not required to express his opinion on matters within the domain of the financial creditor(s), to approve or reject the resolution plan, Under Section 30(4) of the I&B Code At best, the Adjudicating Authority (NCLT) may cause an enquiry into the “approved” resolution plan on limited grounds referred to in Section 30(2) read with Section 31(1) of the I&B Code. It cannot make any other inquiry nor is competent to issue any direction in relation to the exercise of commercial wisdom of the financial creditors-be it for approving, rejecting or abstaining, as the case may be. Even the inquiry before the Appellate Authority (NCLAT) is limited to the grounds Under Section 61(3) of the I&B Code. It does not postulate jurisdiction to undertake scrutiny of the justness of the opinion expressed by financial creditors at the time of voting. To take any other view would enable even the minority dissenting financial creditors to question the logic or justness of the commercial opinion expressed by the majority of the financial creditors albeit by requisite percent of voting share to approve the resolution plan; and in the process authorize the adjudicating authority to reject the approved resolution plan upon accepting such a challenge. That is not the scope of jurisdiction vested in the adjudicating authority Under Section 31 of the I&B Code dealing with approval of the resolution plan…”
“48. Suffice it to observe that the amended provision merely restates as to what the financial creditors are expected to bear in mind whilst expressing their choice during consideration of the proposal for approval of a resolution plan. No more and no less. Indubitably, the legislature has consciously not provided for a ground to challenge the justness of the “commercial decision” expressed by the financial creditors – be it to approve or reject the resolution plan. The opinion so expressed by voting is nonjusticiable. Further, in the present cases, there is nothing to indicate as to which other requirements specified by the Board at the relevant time have not been fulfilled by the dissenting financial creditors. As noted earlier, the Board established Under Section 188 of the I&B Code can perform powers and functions specified in Section 196 of the I&B Code. That does not empower the Board to specify requirements for exercising commercial decisions by the financial creditors in the matters of approval of the resolution plan or liquidation process. Viewed thus, the amendment under consideration does not take the matter any further.
# 24. The contention of the Learned Counsel appearing for the first Respondent that Section 20(2)(c) is to be relied upon which refers to ‘Management of Operation of Corporate Debtor as a going concern’ is untenable as the said Section refers to duties of Interim Resolution Professional. Section 25(2)(c) is relevant to the instant case as it deals with ‘Duties of Resolution Professional’ with respect to raising Interim Finance subject to the approval of the Committee of Creditors under Section 28. Section 28 refers to whether the approval of the Committee of Creditors is required for raising ‘Interim Finance’. It is reiterated by the Resolution Professional that the Corporate Debtor is not a going concern. The Application MA 4002/2019 in CP (IB) No. 2849/MB/2018 was preferred by the employees seeking direction to also pay the salaries for the period prior to the commencement of CIRP cost. It is a well settled proposition of law that for the cost incurred prior to the CIRP process, in case any Resolution Plan is approved, the ‘Resolution Applicant’ shall bear the expenses. In the instant case, it is not in dispute that the Resolution Plan has not been approved and the CoC has recommended for liquidation.
# 25. Additionally, the contention of the Learned Counsel appearing for the Respondent that point 4 of the second Meeting of the CoC proves that the Company was a going concern is unsustainable as it only refers to the RP’s visit to the Plant and cannot be construed to be of any documentary evidence to substantiate the plea of the Respondent that the Corporate Debtor was a going concern.
# 26. CIRP Costs have to be approved by the CoC in terms of Regulation 31 of the CIRP Regulations which reads as hereunder;
“31. Insolvency Resolution Process Cost:- “Insolvency resolution process costs” under Section 5(13)(e) shall mean-
(a) amounts due to suppliers of essential goods and services under regulation 32;
(aa) fee payable to authorized representative under sub-regulation (8) of regulation 16-A;
(ab) out of pocket expenses of authorized representative for discharged of his functions under Section 25-A];
(b) amounts due to a person whose rights are prejudicially affected on account of the moratorium imposed under Section 14(1)(d);
(c) expenses incurred on or by the interim resolution professional to the extent ratified under regulation 33;
(d) expenses incurred on or by the resolution professional fixed under regulation 34; and
(e) other costs directly relating to the corporate insolvency resolution process and approved by the committee.
# 27. Further Section 30(2)(a) of the Code specifies that if a Resolution Plan is approved then the same would provide for the payment of Insolvency Resolution Professional Process cost in a manner specified by the Board in priority by the repayment of other debts of the Corporate Debtor and if such a Plan is not approved and if companies go into liquidation under Section 33(1) of the Code, then the distribution of assets under Section 53(1) would arise.
# 28. Keeping in view all the aforenoted reasons and the ratio of the Hon’ble Supreme Court in ‘K. Sashidhar’ (Supra) that the commercial or business decision of the CoC is non-justiciable, and at best, the Adjudicating Authority may cause an enquiry on limited grounds, and does not have Jurisdiction to undertake scrutiny of the justness of the opinion expressed by the CoC when it has voted by a majority share, we are of the opinion that this ratio is applicable to the facts of this case as the CoC has by a majority vote rejected to raise any ‘Interim Funds’ and the Adjudicating Authority cannot direct the CoC to do the same. Hence, we hold that the direction given by the Adjudicating Authority in MA 4002/2019 are contrary to the provisions of IBC and are hereby set aside.
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Blogger’s comments; In most of the cases of CD under insolvency, the CD is either facing negative cash flows or the operations are closed. It’s very difficult to envisage a company under insolvency with positive cash flows. It’s only the companies with negative cash flows face difficulty in meeting their obligations and slip into insolvency.
As per the Code and regulations, IRP/RP is broadly responsible for the follow;
Execution of Corporate Insolvency Resolution Process in accordance with the provisions of the Code & Regulations thereof.
Manage the CD as a going concern, if it has not stopped operations prior to the date of commencement of insolvency.
In a fairly good number of cases, CoC is reluctant to approve interim finance. This puts the IRP/RP in a precarious situation, as he is responsible to carry out certain statutory duties under the Code besides managing the CD as a going concern. Blogger is of the opinion that CIRP Regulations should have enabling provision (similar to Liquidation process regulations), that the FC with the biggest vote share will provide interim finance, as estimated by IRP /RP, with interest @ MCLR + 2%.
# Regulation 2A. Contributions to liquidation costs.( Liquidation Process Regulations)
(1) Where the committee of creditors did not approve a plan under sub-regulations (3) of regulation 39B of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall call upon the financial creditors, being financial institutions, to contribute the excess of the liquidation costs over the liquid assets of the corporate debtor, as estimated by him, in proportion to the financial debts owed to them by the corporate debtor.
Further the provisions of the Code & Regulations speaks of interim finance for Management of operations of CD as a going concern. The Code as well as Regulations are silent for the situation where the CD is not a going concern and the operations of the CD stopped prior to the DOC of insolvency.
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Lack of professionalism in the working of the CoC.
Most of the financial creditors in CoC are banks. Banks being impersonal legal entities, usually appoint their employees as their authorised representative in CoC, who are not professionals and do not understand the insolvency ecosystem. Here the provisions of the Code are of quite significance.
# Section 24(5) Subject to sub-sections (6), (6A) and (6B) of section 21, any creditor who is a member of the committee of creditors may appoint an insolvency professional other than the resolution professional to represent such creditor in a meeting of the committee of creditors:
Provided that the fees payable to such insolvency professional representing any individual creditor will be borne by such creditor.
The main import of the Section 24(5) of the code is that a financial creditor can attend the meeting of CoC, through a representative who has to be an insolvency professional other than IRP/RP.
The appointment of IP’s as authorised representatives of the banks in CoC will definitely improve the working of the CoC & inculcate the professionalism in the decisions of the CoC. Secondly IP's are being regulated by the Board & IPA’s, their misconduct can be examined by the Board & IPA’s. It is suggested that the Board may make suitable provisions in the regulations and issue a circular on this aspect.
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