Saturday, 22 January 2022

Varrsana Ispat Ltd. (through Mr. Anil Goel, Liquidator) Vs. Varrsana Employee Welfare Association - The Adjudicating Authority (NCLT) has only power to rectify any mistake apparent from the record in accordance with Section 420 of the Companies Act, 2013 R/w Rule 154 of NCLT Rules, 2016.

NCLAT (19.01.2022) in Varrsana Ispat Ltd. (through Mr. Anil Goel, Liquidator) Vs. Varrsana Employee Welfare Association [Company Appeal(AT) (Ins) No. 885 of 2020] held that; 

  • The Adjudicating Authority (NCLT) has only power to rectify any mistake apparent from the record in accordance with Section 420 of the Companies Act, 2013 R/w Rule 154 of NCLT Rules, 2016. 

 

Excerpts of the order;

# 1. The present appeal has been filed by the Appellant- ‘Varrsana Ispat Limited’, through its Liquidator Mr. Anil Goel under Section 61 of the ‘Insolvency and Bankruptcy Code, 2016’ (in short ‘Code’) against the impugned order dated 26.06.2020 passed by the ‘Adjudicating Authority’ (National Company Law Tribunal), Kolkata Bench in I.A No.531/KB/2020 in CP No. (IB) 543/KB/2017. The Appellant has sought the following reliefs :

  • a. The Appellate Authority be pleased to allow the present appeal and set aside the impugned order dated 26th June, 2020, passed by the Adjudicating Authority, Kolkata bench in IA No.531/KB/2020 in CP No. (IB) 543/KB/2017, qua para 21 (a) and (b) of the order;

  • b. The Appellant Authority be pleased to pass an order declaring the distribution made by the Appellant as per the provision of Insolvency and Bankruptcy Code 2016 is valid.

  • c. The Appellate Authority be pleased to pass any other order in the facts and circumstances of the present Appeal and in the interest of the justice and equity.

 

# 3. It is the case of the Appellant/Liquidator that liquidation of the Corporate Debtor (CD) was initiated on 06.08.2019 and ‘Liquidation Account’ was opened on 28.08.2019 to operate receipts and payments. He constituted a ‘Stakeholders Constitution Committee’ (SCC) on 07.10.2019 as per Regulation 31A of the ‘IBBI (Liquidation Process) Regulations’. It was discussed and decided in the ‘SCC’ that the CD shall be kept as a going concern and Rs.20 crore distribution would be done as per Section 53 of the Code (appearing at page no. 105, 115-116, 119 & 121 of the Appeal Paper Book). ‘M/s. Varrsana Employees Welfare Association – R1’ filed IA No. 1546/KB/2019 in CP No.(IB) 543/KB/2017 that the company is a going concern and there is possibility of revival of CD as the Liquidator taking steps to invite scheme from interested party and Liquidator has admittedly realized substantial amounts of money of Rs.18 crore and the amount is disbursed, the cash flow of the CD will have no adverse impact on the operation of the Company.

 

# 4. However, the Adjudicating Authority has passed an order vide order dated 14.01.2020 in C.A(IB) No.1546/KB/2019 in CP (IB) No.543/KB/2017 Clause 4 & 5 enumerated below :

  • “Clause 4- We have heard the Appellant and Non-applicant including Learned counsel for the Liquidator and after hearing the parties, we are of the view that there is no justification for the Liquidator to withhold the aforesaid amount of Rs. 18.00 crores and odd, lying with the Liquidator and it is directed that the same may be utilized for the operations of the Corporate Debtor to remain Corporate Debtor as going concern for distribution amongst stakeholders in equal manner as per provisions of Section 53 of the Code, which would include the claims of the employees, if any.

  • Clause 5. – With the aforesaid observations the application CA(IB) No.1546/KB/2019 stands disposed of accordingly.”

 

# 5. It was submitted by the Liquidator in compliance with the aforesaid order and as discussed in the ‘3rd SCC Meeting’ on 03.02.2020, he disbursed Rs. 21 Crore on 04.02.2020 and Rs. 5 Crore on 16.06.2020. While disbursing the amount to the Stakeholders, he took and undertaking from them in accordance with Regulation 43.  . . . 

 

# 6. It is also submitted that the R1 once again filed another Application bearing IA No.531/2020 against the Liquidator for wrongful deduction of salary and distribution during the process of the liquidation. The Adjudicating Authority vide its order dated 26.06.2020 passed the following orders:

  • “20. In view of the matter discussed above, and the position of law, we come to a conclusion that the disbursement by the liquidator from the working capital and profit kept in the account of the liquidator/CD before liquidating the assets is not in accordance with the provisions of the Code and Regulations. So also we hold that the pay cut from the salary of the employees of the CD is arbitrary and not just and proper. In the said background a question arises as to whether the financial creditors who had received the fund are to be ordered to refund? In this regard it is good to refer to Regulation 43. Reg.43 states that the stakeholders shall return the monies after distribution if the stakeholders are found to be not entitled to at the time of distribution. So no doubt the financial creditors are bound to return any monies received during distribution which they were not entitled to receive during distribution. However, in the case in hand since the CD being in operation and there is enough working capital as submitted by the liquidator (About 40 crores) there is no need to return. However, in the peculiar nature and circumstances brought out in the instant case, it appears to us that the amounts received by the respective financial creditors shall be kept by them in an Interest bearing account of the CD. It would meet the ends of justice in the nature of this case. However, the liquidator is found liable to make good the portion of salary deducted from them with applicable bank interest.

  • 21. In view of the matter, we are allowing the application as per the following orders:

  • a. The distribution of funds from working capital and profit to the stakeholders until assets have been liquidated, and till the liquidator realizes the complete liquidation value is not in conformity with the provisions of the Code and Regulations;

  • b. The stakeholders/financial creditors who are in receipt of the funds shall keep the amount received by them in an interest bearing account of the CD, and returnable as per Regulation 43, if need arises for operating the CD;

  • c. The liquidator is directed to pay the portion of salary deducted from the salary of the employees with applicable bank interest till the date of payment.IA (IB) No. /KB/2020 is disposed of accordingly. The Registry is directed to send e-mail copies of the order forthwith to all the parties.”

 

# 7. The Liquidator has also convened a meeting of KMPs of the CD who are running the steel plant and discussed about the working capital available with the CD. That it was found that the working capital available with the CD was sufficient for the requirement. Therefore, it was decided that funds are not required for the operations of the CD and should be distributed as per the order of the Adjudicating Authority (Appearing at page no. 74-76 of the appeal paper book).

 

# 8. The Liquidator has also submitted that pursuant to the decisions taken in the SCC Meetings and old debts of the CD had been recovered by him. Therefore, these disbursements were made in compliance with the provisions of the Code as well as the Liquidation Regulations as is indicated herein below:

 

(I) All disbursement was made only pursuant to the decisions taken in the SCC Meetings.

Contention of the R1 and observations made in the impugned order regarding distribution of funds from working capital and profit to the stakeholders until assets have been liquidated and till the liquidator realizes the complete liquidation value being contrary to the provisions of the Code is wholly misplaced as the Liquidator in consultation with the SCC was bestowed with the power to distribute the money to the stakeholders. The SCC in its 1st and 2nd meeting on 12.11.2019 and 17.12.2019 specifically discussed disbursal of amounts received from old debtors to the stakeholders and as director by the order dated 14.01.2020 and the 3rd SCC Meeting, disbursement of Rs. 26 crores was made in two tranches:

  • a. 04.06.2020 wherein a sum of INR 21 crores was disbursed.

  • b. 16.06.2020 wherein in a sum of INR 5 Crores was disbursed.

The aforesaid, is clearly indicative of the fact that the Liquidator has in no manner acted on its own accord and has in fact acted in compliance with the discussions that took place in the SCC Meetings.

 

(II) Liquidator is bound by the provisions of the Code and Liquidation Regulations.

A bare perusal of Regulations 39 of the Liquidator Regulations states that the Liquidator shall recover and realize all assets of and dues to the CD in a time-bound manner for maximization of value for the stakeholders. Notably, after immense efforts made by the Liquidator, a recovery from sundry debtors was made and an amount of INR 26 Crores was disbursed in two tranches. Pertinently, the Liquidator Regulations also prescribed a strict timeline (i.e.90 days from the receipt of the amount) within such moneys received are to be distributed to the stakeholders. In the present case the Liquidator has complied with the said requirement and disbursed the same. Therefore, keeping the distribution pending until the conclusion of the liquidation process would be wholly contrary to the provisions of the Code and the Liquidation Regulations.

 

(III) Balance Salary and Interest has been paid to the employees therefore, employees have no locus to challenge the disbursement of money.

As directed by the Adjudicating Authority vide the impugned order dt 14 th January 2020 , the Liquidator has disbursed the amount that had been deducted from the salary of the employees of the CD in June 2020 itself. While there was a minor delay in making payment of the interest accrued, the same has been paid to them in September, 2020. Pertinently, the SCC Meeting dated 01.10.2020 also records that the payment has been made to the employees as directed vide impugned order.

 

Furthermore, it is also to highlight herein that vide order dated 28.05.2021, the Adjudicating Authority has held that since there is no subsisting claim of the employees, there is no question of including a representative of the workmen and employees on the SCC. Thus, the employees today have no locus to challenge the decisions of the SCC/disbursement of amounts to the stakeholders. It is also apposite to highlight herein that currently, the CD is running smoothly and all the employees are getting their salaries on a regular basis. Therefore, distribution of the surplus funds of the Financial Creditors, shall in no manner prejudice the employees and workmen (appearing in order dated 28.05.2021 passed by the Adjudicating Authority).

 

It is important to highlight that all CIRP costs and Liquidator costs have been met. There are no claims filed on behalf of workmen dues. As such under Section 53 of the Code, there is no fetter on payment to the Secured Creditors from idle funds under the priority set out in Section 53 of the Code. As mentioned above, the employees who have no claims pending have no locus to challenge this disbursement.

 

# 11. The Respondent No.1- Varrsana Employee Welfare Association has stated that The Liquidator is not an aggrieved person as the impugned order directs the Respondent Banks to refunds the money illegally distributed to them by the liquidator. The Liquidator cannot maintain this appeal. The Liquidator has not appealed against the order dated 14.01.2020 and hence, he cannot prefer this appeal as the issued attained finality.

 

# 19. It is also stated that the CD is running as a going concern by the Liquidator and also earning their profit and there is no outstanding salary and wages due of the workman under the employee of the CD which has been paid upto date even the amount deducted buy the Liquidator has also been payed by virtue of the order dated 26.06.2020. It is pertinent to mention that for running of the Company/business enterprise/production activities of the CD four factors of products are required to run the same which is land, labour capital and Entrepreneurship which are the factor of production resources or inputs are what is used the productions process to produce the output.

 

# 24. We have gone through the submissions made by the Ld. Counsels for the parties including the ‘written submissions’ and other relevant documents available on record and have following observations: –

a. The ‘Adjudicating Authority – National Company Law Tribunal, Kolkata Bench’ has allowed on 14.01.2020 in CA(IB) No.1546/KB/2019 in CP(IB) No.543/KB/2017 for distribution amongst Stakeholders including the claims of the employees in accordance with Section 53 of the Code, the same is extracted below (at page 128 in clause 4 of the Appeal Paper Book):

  • “Clause 4- We have heard the Appellant and Non-applicant including Learned counsel for the Liquidator and after hearing the parties, we are of the view that there is no justification for the Liquidator to withhold the aforesaid amount of Rs. 18.00 crores and odd, lying with the Liquidator and it is directed that the same may be utilized for the operations of the Corporate Debtor to remain Corporate Debtor as going concern for distribution amongst stakeholders in equal manner as per provisions of Section 53 of the Code, which would include the claims of the employees, if any.

 

b. The same Adjudicating Authority – National Company Law Tribunal, Kolkata Bench, vide its order dated 26.06.2020, on a petition filed by the ‘Employees Welfare Associations’ of the Varsana Ispat Limited – CD has virtually reversed its decision (earlier Adjudicating Authority) by asking the Liquidator that the Stakeholders/Financial Creditor who are in receipt of the funds shall keep the amount in an interest bearing account of the CD and returnable if need arises for operating the CD and also directed the Liquidator to pay the portion of salary deducted from the salary of the employees with applicable bank interest. The order dated 26.06.2020 of the Adjudicating Authority para 21 at page 57 of the Appeal Paper book is extracted below:

  • “21. In view of the matter, we are allowing the application as per the following orders:

  • a. The distribution of funds from working capital and profit to the stakeholders until assets have been liquidated, and till the liquidator realizes the complete liquidation value is not in conformity with the provisions of the Code and Regulations;

  • b. The stakeholders/financial creditors who are in receipt of the funds shall keep the amount received by them in an interest bearing account of the CD, and returnable as per Regulation 43, if need arises for operating the CD;

  • c. The liquidator is directed to pay the portion of salary deducted from the salary of the employees with applicable bank interest till the date of payment. IA (IB) No. /KB/2020 is disposed of accordingly. The Registry is directed to send e-mail copies of the order forthwith to all the parties.”

 

It is also being observed that there is no subsisting claims of the employees and all the employees are getting their salary on a regular basis.

 

c. All CIRP costs and liquidation costs have been recouped. It is also revealed from the written submission of the Liquidator wherein at page no.14, he has enclosed order dated 28.05.2021 of the Adjudicating Authority in IA No.1014/KB/2020 in CP(IB) No.543/KB/2017 that the gratuity claim of the employee is also not existing and accordingly, the Adjudicating Authority has held vide para 10.1 of the order dated 28.05.2021 that the prayer of inclusion of the representative of the workmen of the employees on the SCC is not acceded to since the workers at this point of time do not have a subsisting claim. It is also observed from the same clause 10.1 of the said order the Liquidator has refunded the fee of Rs.1.5 Crore. It is also mentioned in that order vide clause 10.1.I that for proper constitution of SCC ,Liquidator is to take appropriate steps. It is also pointed out in the order dated 28.05.2019 that Varsana Employee Welfare Association has filed this fourth Petition.

 

d. The present appeal is not time barred, in terms of Hon’ble Supreme Court Order in M.A No.665/2021 in SMW (C) No.3/2020 regarding cognizance of extension of limitation has already extended, the limitation for institution of proceedings etc., and hence this appeal is well within limitation (26.06.2020 impugned order , 28.09.2020 appeal filed ) in terms of the direction of the Hon’ble Supreme Court.

 

e. It is also revealed that IBBI in its interim order dated 29.10.2020 has found that the Liquidator has made distribution without complying with the provisions of the Code and related Regulations and has debarred him from undertaking any new assignments for a period of 90 days from the date of said order. It is also revealed that he has distributed so called surplus fund generated out of collection of old dues from Debtors to the following banks: –

  • i. Central Bank of India

  • ii. Corporation Bank of India

  • iii. UCO Bank

  • iv. United Bank of India

  • v. Indian Overseas Bank

All these banks are ‘Nationalised Public Sector Banks’ and distribution has been done by the Liquidator after taking undertaking that they will return the money, if they are not entitled in accordance with Regulation 43 of the IBBI (Liquidation Process) Regulations, 2016

 

f. The Respondent no.5 – Union Bank of India has justified the appeal filed by the Liquidator and has stated that the CD availed Financial facility from the Financial Creditors and are entitled to recover the money as these are public money and the financial creditors are duty bound to collect interest thereon.

 

g. For brevity and clarity the various related provisions in regard to the realisation during the liquidation process and its distribution are given hereunder: section 35, 36 53 of the Code as stated (supra). . . . . .

 

h. Regulation 4, 32A, 39 & 42 IBBI (Liquidation Process) Regulations 2016:- . . . 

 

As it looks the recovery from the Debtors are also forming part of liquidation estate and it is also revealed that he has complied with Regulation 43 of the IBBI Regulations by taking appropriate undertaking from the concerned bankers.

 

# 25. Conclusion:-

What we observe that the Adjudicating Authority in its impugned order dated 26.06.2020 has reviewed its own order dated 14.01.2020 in C.A(IB) No.1546/KB/2019 in CP (IB) No.543/KB/2017. The Adjudicating Authority (NCLT) has only power to rectify any mistake apparent from the record in accordance with Section 420 of the Companies Act, 2013 R/w Rule 154 of NCLT Rules, 2016. The Code also provides for appeals and Appellate Authority vide section 61 of the Code. For brevity and clarity, the same is extracted below: . . . 

 

In view of aforesaid provisions of law and facts on record, the appeal is partially allowed by setting aside the impugned order of Adjudicating Authority dated 26.06.2020 as stated at clause ‘a’ of the relief sought.

 

Pending application, if any, stands disposed off.

 

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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.