Tuesday 1 March 2022

Dr. Periasamy Palani & Ors Vs Mr Radhakrishnan Dharmarajan RP Appu Hotels Limited & Ors - The Related Party financial or operational creditor cannot be discriminated against under the Resolution Plan, denying their right to get payments under the resolution Plan only on being a Related Party.

NCLAT (17.02.2022) in Dr. Periasamy Palani & Ors Vs Mr Radhakrishnan Dharmarajan RP Appu Hotels Limited & Ors (Company Appeals (AT) (CH)(Insolvency) No.164, 176, 218 & 219 of 2021)  held that;

  • The increase in RP fees with retrospective effect can not be considered as CoC’s prudent decision. 

  • A valuation consisting of mere naked values without a detailed report is not valid. It is a settled proposition that the Valuation exercise is conducted to facilitate the CoC’s decision-making process.

  • A natural sequitur to those above would be that a detailed valuation report is necessary for the CoC to exercise its commercial wisdom objectively.

  • Non-publication of notices of Form G is a material irregularity in exercise of the powers by Resolution Professional during the Corporate Insolvency Resolution period.

  • It is clear that IBC treats related parties as a separate category for specified purposes, excluding from the CoC under Section 21 and disqualifying them from being Resolution Applicants under Section 29A.

  • Therefore, the Related Party financial or operational creditor cannot be discriminated against under the Resolution Plan, denying their right to get payments under the resolution Plan only on being a Related Party.


Excerpts of the order;

ANALYSIS

# 75. We have heard the arguments of the learned counsel for the parties and perused the record. Appellant’s objection is based on the following points;

  • a) The ‘Form G’ for inviting ‘EOI'1 was neither published on the Corporate Debtor’s website nor posted on the website designated by the IBBI2.

  • b) The IRP had received claims from a large set of Unsecured Financial Creditors. Still, the IRP/RP did not proceed to accept or reject the Unsecured Financial Creditors’ claims, which resulted in excluding the said unsecured creditors from the entire decision-making process.

  • c) CoC has not considered the OTS DT. 21.1.2021.

  • d) The approved resolution plan discriminates between the related party unsecured financial creditors with other unsecured financial creditors.

  • e) The estimate of the Fair Value and Liquidation Value of the Corporate Debtor is computed without physical verification of the Corporate Debtor’s assets. Therefore, the entire valuation process of the Corporate Debtor is in total disregard of the Regulations.

  • f) The Resolution Applicant is disqualified under Section 164 (2) (b) of the Companies Act 2013 hence ineligible under Section 29 A (e) of the Insolvency and Bankruptcy Code to submit a Resolution Plan.

  • g) The COC does not approve the revised Resolution Plan.

 

# 76. Based on the pleadings of the parties following issue arises for our consideration ;

  • Whether the approved Resolution Plan contravenes Section 30 (2) and Sec 61(3) of the Insolvency and Bankruptcy Code 2016?

 

# 77. The Appellant contends that the approved Resolution Plan is in contravention of section 30 (2) and Sec 61(3) of the Insolvency and Bankruptcy Code 2016. The Appellant raises the following points to show the violation of the statutory provision of Section 30(2) & 61(3)of the Code.


A. Objections about Valuation of the Corporate Debtor

# 79. While dealing with the irregularities about the Valuation of the corporate debtor, the Resolution Professional relied on the judgement of this Appellate Tribunal in Company Appeal AT (CH) (Ins) No. 19 of 2021. The proceedings of Company Appeal (AT) (CH) (Ins) No. 19 of 2021 pertains to an order dated 23 December 2020 passed by the Adjudicating Authority under Section12 (2) of the Code, excluding the period commencing from 5 May 2022 to 31 October 2020 to provide the benefit under Regulation 40 C. The said Appeal was preferred at the instance of one shareholder, namely, Mr Ramasamy Palaniappan. It did not pertain either to the statutory violations in the process of CIRP and the Resolution Plan or the eligibility of the 2nd Respondent to act as a resolution applicant. Merely because the said Mr Ramasamy Palaniappan was unable to produce any evidence to show the actual Valuation on an earlier occasion, the Appellant cannot be prevented to produce such evidence to establish the illegality in the CIRP.

 

# 80. It is pertinent to mention that the Approval of the Resolution Plan by the COC is directly attributable to the fact that the COC was not properly apprised of the actual value of the Corporate Debtor’s assets. The choices of the valuers by the IRP have been questionable since the 2nd COC meeting. The concern stems from the fact that the valuers were based in Delhi and had little knowledge of the prevailing real estate market conditions in Tamil Nadu. The circumstances were further separated by the fact that valuers lacked adequate experience with the hospitality industry. In this regard, it is pertinent to note the minutes of the 2nd COC meeting, which reads as follows;

  • “At this juncture, the COC members have raised concerns regarding the appointment of the valuers as the appointed valuers are Delhi-based and are not privy to the area/properties of Tamil Nadu and might also a struggle to visit the collective sites of the corporate debtor located at Tamil Nadu given that travel restrains in the current period—– the competency of the process valuation might decrease. The COC members also requested the chairman to circulate the profiles in a comparative chart. The members had difficulty being faced evaluating the profile/experience of the appointed valuers with respect to the hospitality industry.”

 

# 81. It is further evident from the minutes of the COC meetings that the two valuers appointed by the IRP differs significantly and therefore warranted the appointment of a third valuer. Furthermore, the RP has also admitted in the 6th COC meeting that only the ‘Core Assets’ of the Corporate Debtor were valued, and the ‘Non-Core Assets’ has not been appropriately valued. Therefore, the 3rd Valuer was also supposed to value the Non-Core Assets. Still, the RP, as evident from the minutes of the 6th meeting of the Committee of Creditors, made it clear that another valuer needs to be appointed to value the Company’s non-core assets, which was not done. Therefore, the Valuation of the non-core assets is not in compliance with Regulation 35 (1) (a) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

 

82. It is pertinent to point out that due to lockdown, quarantine and travel restrictions, the appointed valuers could not conduct the Valuation and their agents at or near Chennai who are not registered valuers and lacked the expertise to conduct the exercise on their behalf. Therefore, further physical verification of the assets by the registered valuers is indispensable, and the Respondent has taken the same note before furnishing the Valuation to the COC. Moreover, the details of the purported “Associates” of the ‘Registered Valuers’ have not been disclosed, and the COC has neither considered nor approved the said Associate Valuers. Conveniently, the valuation reports have not been disclosed to date, and only the Valuation is sought to be accepted as gospel truth. Therefore, the Valuation furnished to the COC is in utter violation of Regulation 35 (1) (a) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and contrary to Rule 8 of the Companies (Registered Valuers and Valuation) Rules, 2017.

 

# 83. Further, it is necessary to mention that many members of the COC raised concerns relating to the Valuation. Even in the 7th meeting of the COC, concerns were raised as to the fact that the Resolution Plan values the Corporate Debtor at a rate that is significantly lower than the already paltry Valuation arrived at by the IRP. Moreover, the RP himself admitted the aforesaid fact in the aforesaid meeting.

# 84. The Appellant further contends that it has come to notice that one of the registered Valuers appointed during the CIRP viz, Mr Vikas Agarwal, is not a registered valuer, as seen from the official website IBBI. The purported Registration No. IBBI/RV/07/2019/12, 228 belongs to Mr Sanjay Suresh Ranadey, who is not connected to the case. The Appellant has also annexed the search result extracted from the official website of the IBBI in this regard. It is thus evident that the entire process of Valuation is tainted with fraud and mala fides.

 

# 86. Based on the above discussion, it is apparent that the two valuers appointed by IRP did not physically verify the corporate debtor’s assets despite that Regulation 35 (1) (a) of the CIRP Regulations mandates explicitly that the estimate tor fair value and liquidation value shall be computed after physical verification of the assets of the Corporate Debtor. It is further revealed that the valuation report was never circulated either to the Appellant or to other members of the COC. Mere production of naked values without the detailed adjunct report would materially handicap the commercial wisdom of the Committee of Creditors.

 

# 87. Further, Regulation 27 Regulation 35 mandates that two registered valuers value the Corporate Debtor’s assets. It is an admitted fact that the two registered valuers appointed by the Resolution Professional did not value the non-core assets of the Corporate Debtor. However, in view of the detailed valuation report, no member of the COC of the Appellant herein has any idea as to what was categorised as a ‘Non-Core Assets’ by the Resolution Professional or what its value could be. These are the blatant statutory violations and irregularities committed in violation of the corporate debt assets.

 

# 88. However, the learned Adjudicating Authority/NCLT’s observation that ‘A statutory provision regulating a matter of practice or procedure will generally be read as a directory and not mandatory is erroneous. Compliance with statutory requirements in regulating a matter of practice and procedure are mandatory.’ The Tribunal is a creature of statute, and by interpretation, it cannot dilute the statutory compliances.

 

# 89. Exclusion of unsecured creditors from the entire decision-making process;

a) The Appellant contends that IRP had received claims from a large set of Unsecured Financial Creditors. Still, the IRP/RP did not proceed to accept or reject the Unsecured Financial Creditors’ claims, which resulted in excluding the said unsecured creditors from the entire decision-making process.


Non-Publication of Form-G As Per Regulation 36A(2) (iii) of the IBBI Regulations for Corporate Persons, 2016

# 90. As per Regulation 36A(2)(iii), the RP shall publish ‘Form-G’ on the Corporate Debtors and IBBI websites. This would ensure adequate publicity to all prospective Resolution Applicants. This was admittedly not done by the RP. The IRP published the Form-G only in a newspaper.

 

# 91. In fact, in the 5th CoC Meeting dated 12.11.2020, while discussing whether ‘Form G’ should be re-published, the present RP points out that it was not published on the IBBI website, which may lead to litigation in the future. However, no steps were taken to re-publish ‘Form-G’ and invite fresh bids despite this. This was done despite the exclusion of the period between 05.05.2020 and 31.10.2020 from the period of CIRP by the Ld. Tribunal.

 

# 98. It is pertinent to mention that an appeal against the approval of the Resolution Plan shall lie under Section 61 (3) of the IBC on the ground, namely, there has been a material irregularity in exercise of the powers by Resolution Professional during the Corporate Insolvency Resolution period.

 

# 99. Further, it is necessary to mention that Regulation 36 A of CIRP Regulations mandates publication of Form-G at the earliest, not later than the 75th day from the insolvency commencement date, from interested and eligible prospective resolution applicants to submit Resolution Plans.

 

# 100. Non-compliance with the above regulatory provision is admitted. It is also important to point out that this entire CIRP was conducted during lockdown when the world faced Covid19 Pandemic. At that time, most people avoided reading the newspaper under the apprehension of Covid infection. So the publication of ‘Form-G’ for inviting Expression of Interest was essential. It is also important to point out that the Government of India also brought some amendments in the Code considering the impact of the Pandemic. Relevant Regulation about inviting ‘EOI’ is given below for ready reference;

 

# 101. Resolution Applicants ineligibility u/s 29A(e) of the Code

a) The Appellant contends that there is a violation of Section 88 of the Indian Trust Act, 1882. It is seen from the final list of prospective Resolution Applicants dated 26.09.2020, issued by the IRP, that a prospective Resolution Applicant, namely, ‘Sri Balaji Vidyapeeth’, is ineligible on the ground that it is a ‘Charitable Trust’ and it cannot run a profit-making entity. It is seen from the approved resolution plan that R-2 is the founder and Managing Trustee of the said ‘Sri Balaji Vidyapeeth’.

b) However, “Sri Balaji Vidyapeeth” was a prospective Resolution Applicant and found ineligible was wholly suppressed from the CoC. Therefore, IInd Respondent being the Managing Trustee of Sri Balaji Vidyapeeth, has proceeded to submit the Resolution Plan by competing with the same Trust by taking advantage of his fiduciary position within the meaning of Section 88 of the Indian Trust Act, 1882. Since the said Trust has already been declared ineligible, R-2 cannot be permitted to act as its alter ego in implementing the Resolution Plan and attain any financial advantage or gain, which is barred under Section 88 of the Trust Act.

c) IInd Respondent /SRA is the Managing Director of ‘MGM Healthcare Private Limited’. The Resolution Plan states that ‘MGM Healthcare’ is looking forward to setting up new hospitals in the State of Tamil Nadu envisages to expand pan India and becoming a leading hospital chain in India. At the same time, IInd Respondent proposes in the Resolution Plan to convert the ‘Coimbatore property’ of Corporate Debtor into a hospital, which would directly conflict with ‘MGM Healthcare’ interest. Therefore, the Resolution Plan submitted by R-2 is hit by Section 166(4) of the Companies Act, 2013, which reads as follows:

  • “Section 166 (4) A director of a company shall not involved in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.”

 

# 108. It is illogical and fallacious to claim that the Resolution Plan can be tested in terms of the provisions of IBC, 2016 and not under Section 88 of the Indian Trusts Act. Therefore, it is submitted that even as per the provisions of IBC, a Resolution Plan shall be by the provisions of all other statutes, and the Resolution Plan mustn’t contravene the law of the land. In this regard, it is pertinent to note Sections 30 and 61 of the Code, which reads as follows:

  • Section 30. Submission of Resolution Plan.

  • (2) The Resolution professional shall examine each resolution plan received by him to confirm that each resolution plan

  • (e) does not contravene any of the provisions of the law for the time being in force.

  • Section 61. Appeals and Appellate Authority. –

  • (3) An appeal against an order approving a resolution plan under section 31 may be filed on the following grounds, namely: —

  • (i) the approved resolution plan is in contravention of the provisions of any law for the time being in force;.”

 

# 112. The case on hand squarely falls within the ambit of Section 88 of the Indian Trusts Act, and as such, the Resolution Plan is illegal. Since the said ‘Sri Balaji Vidyapeeth’ has already been declared as ineligible, the 2nd Respondent cannot act as its alter ego in implementing the Resolution Plan and attain any financial advantage or gain is barred by Section 88 of the Indian Trusts Act.

 

# 113. Objections about 2nd Respondents disqualification as a director under Section 164 (2) (b), Companies Act, 2013 and consequently under Sec. 29A(e) of the Insolvency and Bankruptcy Code 2016.

 

# 114. The Appellant had submitted that IInd Respondent is a Director of a Company, namely, M/s International Aviation Academy Private Limited7 (for brevity ‘IAAPL’). It is seen from the audited financial statements of the said Company from 2010-11 to 2017-18 that a sum of Rs. 12,03,000/- has been collected as ‘share application money pending allotment’. Therefore, it appears that the sum has not been refunded. As such, the same shall be treated as a deposit in terms of proviso to Explanation (a) of Rule 2(1)(c)(vii) of the Companies Act (Acceptance of Deposits) Rules, 2014.

 

# 115. In the above circumstances, given Section 164(2)(b) of the Companies Act, R-2 has been disqualified from acting as a Director in any company for five years from the date such Company failed to repay the deposit and even assuming these amounts have been repaid during the Financial Year 2018-19, R-2 is disqualified from acting as Director till date. Thus, R-2 is ineligible to submit the Resolution Plan under Section 29 A (e) of the I&B Code. However, R-2 deliberately suppressed the same and submitted the Resolution Plan fraudulently. Unfortunately, IRP and RP( R-1) failed to conduct proper due diligence and report the above statutory violation to CoC or the Adjudicating Authority.

 

116. In response to the above, the Ld Senior Counsel for the IInd Respondent submits that;

d) Respondent No. 2’s directorship, as per the Ministry of Corporate Affairs, Government of India website, still shows as active compliant. As long as a Director is an active compliant under the Companies Act, Sec. 29A(C), IBC, 2016 would not apply. As per Sec. 29A, IBC, the following persons are ineligible to be a Resolution Applicant:

  • 1. is an undischarged insolvent;

  • 2. is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949;

  • 3. Or, an account of a corporate debtor [at the time of submission of the resolution plan has an account) under the management or control of such person or of whom such person is a promoter, classified as a non-performing asset under the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949) (or the guidelines of a financial sector Regulator issued under any other law for the time being in force,) and at least one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor;

  • 4 has been convicted for any offence punishable with imprisonment – (i) for two years or more under any Act specified under the Twelfth Schedule; or (ii) for seven years or more under any law for the time being in force;

  • 5 is disqualified from acting as a director under the Companies Act, 2013 (18 of 2013);

  • a. is prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets;

  • b. has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code;

  • c. has executed (a guarantee) in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code [and such guarantee has been invoked by the creditor and remains unpaid in full or part;

  • d. ………

  • e. ………

e) It is undeniable that neither any of the aforesaid events have actually happened with respect to Respondent No. 2 nor any competent authority under the relevant laws with respect to the aforesaid matters has passed any order, direction or decision declaring, convicting, disqualifying or prohibiting Respondent No. 2 in any manner. Sec. 29-A would, if at all, come into operation upon after the competent Authority has done any of the aforesaid against Respondent No. 2.

f) There is no other provision in the IBC with regard to the ineligibility of a Resolution Applicant. Further, it is clear that Sec. 29A(e), IBC categorically provides for persons to be ineligible as resolution applicants. Therefore, the Act should have already happened and been declared by the competent Authority to be ineligible. Neither CoC nor Adjudicating Authority can presume ineligibility unless the above disqualification has already been found and held by the competent Authority under the concerned statute. Therefore, assumption of or deemed ineligibility by inference is not provided under Sec. 29A, IBC.

 

117. The learned Senior Counsel for the 2nd respondent has vehemently argued that the objection raised by the appellant was never raised before the Adjudicating Authority. In response to this objection, Learned Counsel for the appellant submits no estoppel against a statute. Section 61 (3) empowers the Appellate Tribunal to question irregularities and illegalities in the CIRP, including the Resolution Plan. The Resolution Plan being in rem, these questions fall within the exclusive purview of judicial review. These grounds cannot be eschewed from consideration on the simple ground that they were never raised before NCLT, as persons who were not before NCLT are also before this court

 

# 125. It is correct to say that the IRP/RP should be concerned as to whether a Resolution Application submitting his EOI is eligible as per the provisions of Section 29-A of the Code. Apparently, in the case on hand, the 1s Respondent has not properly verified the eligibility of the 2nd Respondent and has acted solely based upon the false declarations given by the 2nd Respondent.

 

# 126. However, the Appellant is well within his rights to question the legality of the CIRP and the Resolution Plan.

 

# 127. Based on the above discussion, it is clear that the 2nd Respondent is disqualified as a director under section 164 (2) (b), Companies Act, 2013 and consequently ineligible to submit a Resolution Plan under Sec. 29A(e) of the Insolvency and Bankruptcy Code 2016.

The Revised Resolution Plan was never placed before the AA/NCLT for final Approval.

 

Admittedly, the last CoC meetings were conducted on 22.01.2021, and it is unknown how the Resolution Plan dated 25.01.2021 could have been approved by the CoC [Pg. 1 of Addl. Documents-Vol. 1 (Resolution Plan)].

 

# 130. On perusal of the minutes of 9th COC, it is clear that COC did not finally approve the Resolution Plan on 22 January 2021. In this meeting, COC sent back the Resolution Plan to the Resolution Applicant for further revision based on the CoC Resolution. This revised Resolution Plan dated 25 January 2021 was never sent for Approval before the COC.

 

# 131. The Resolution Professional’s statement that ‘the revised Resolution Plan was approved at the 9th COC meeting’ is incorrect. Although the Resolution Plan was allegedly approved on 22 January 2021, it is not the Revised Resolution Plan. Instead, the Resolution Plan was further modified based on the CoC resolution Dt.22.1.2021. But the final Revised Resolution Plan, dated 25 January 2021, was never laid before the CoC for its approval. Thus the approval of the Resolution Plan by the Adjudicating Authority is not in compliance with Sec. 31(1) of the I & B Code, 2016.

 

# 132. It is pertinent to mention that after Approval of the Resolution Plan by COC entire exercise for revising the Resolution Plan for making a complaint with Section 30 (2) of the Code was left with the Resolution Applicant. Revised Resolution Plan dated 25 January 2021, without further approval of CoC, was presented by RP before the Adjudicating Authority for approval, which was finally approved by the impugned Order.

 

# 135. After “revision”, the revised plan is never put to the vote. Instead, it is filed to NCLT directly, without any approval from the COC on the revised Resolution Plan. Sections 30(2), 30(4), 30(6) and Section 31 mandate that only a plan as approved by the ‘COC’ can be presented to the NCLT for its approval under Section 31. Such kind of procedural failure amounts to material irregularity and goes to the root of the matter, making the plan void and non-est in law, as it is trite law that where the law permits a thing to be done in a particular manner if the same is not done in that manner, the same is non-est in the eyes of the law.

 

Non-consideration of 12 A

# 143. Based on the pleadings of the parties, it appears that a settlement offer was made, and a 12 A application was to be submitted after getting the consent of 90% members of the COC. In the circumstances, the appellant requested to consider the settlement proposal in the COC. However, COC was never called to consider the settlement offer. The Resolution Professional has contended that the COC has rejected the settlement offer in its 9th meeting. This statement is also not as per the minutes of the 9th COC meeting. It appears from the minutes of the 9th COC that only a Resolution Plan was discussed in that meeting. After that, the Resolution Plan was sent back to the resolution applicant by CoC for reconsideration and revision. In the 9 COC meetings, no discussion about the settlement offer occurred. It is essential to mention that after admission of the petition and formation of the Committee of Creditors, Section 12A application for withdrawal could only be accepted if the CoC approves the proposal with a 90% vote share. It is undisputed that COC, under its commercial wisdom, had full liberty to either accept or reject the settlement offer. But consideration of the settlement offer is essential. At this juncture, this tribunal “Worth recalls and recollects” the judgement of Hon’ble 3 Member Bench of this Tribunal in Company Appeal (AT) (Ins) No.91 of 2019 dated 6 September 2019 between Shaji Purusothaman v Union Bank of India and others (reported in MANU/NL/0438/2019) whereby and whereunder at paragraph 9 it is observed that;

  • “if an application u/s 12 A is filed by the Appellant, the Committee of Creditors may decide as to whether the proposal given by the appellant for settlement in terms of Section 12 A is better than the resolution plan as approved by it, and may pass appropriate order. However, as such decision is required to be taken by the “Committee of Creditors”, we are not expressing any opinion on the same.”

 

# 144. In this case, CoC never considered the settlement proposal submitted by the Appellant. Although, after getting the settlement proposal, it was incumbent upon the resolution professional to call the COC meeting to consider the settlement proposal. It is essential to mention that the settlement offer could not have been rejected without consideration by the COC.

 

Company Appeal CA (AT) (Ins) 176 of 2021

# 145. In the Company Appeal mentioned above, CA (AT) (Ins) 176 of 2021 Resolution Plan is challenged on the ground that the Resolution Plan is violative of the IBC and Article 14 of the Constitution; there has been a material irregularity in the exercise of the powers by the RP, and the Appellant who is also an Operational Creditor has not been provided for.

 

# 146. Resolution Plan is Discriminatory

i. The appellant contends that the Resolution Plan discriminates against the Appellant by providing no payment to it on the ground that it is a Related Party, even though the debt is admitted. The IBC does not permit discriminatory plans to be approved. Binani Industries (Supra) was challenged before the Hon’ble Supreme Court was dismissed.

vi. The IBC treats related parties as a separate category for specified purposes, excluding them from CoC under section 21 and disqualifying them from being Resolution Applicants under section 29A. However, the IBC does not treat Related Party as a separate class for any other purpose. Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification. In Phoenix ARC Private Limited w. Spade Financial Services Limited, 20213 SCC 475 [Paras 63, 81-82, 98-99 @Pgs. 286-339] the Hon’ble Supreme Court dealt with in detail the reason for treating related parties as a separate class and held that they are excluded from the CoC so that they do not impede and interfere with the Resolution Process. This rationale is achieved by excluding them from the CoC and submitting Resolution Plans. However, for payment under the Resolution Plan, there is no reason to treat them as a separate class.

 

# 158. On the facts of the present case:

  • a. The CoC had the discretion to decide regarding payment of an admitted claim to a related party depending on its relationship with the Corporate Debtor. The facts of the case show that the top key management personnel of the Corporate Debtor also control and run the Appellant. Mr Palani G. Periyasamy (the Appellant in Appeal No. 164 of 2021) is the Chairman of the Corporate Debtor and the Appellant. Mr K. Kandasamy is the Managing Director of the Appellant and Director of the Corporate Debtor. Mr Visalakshi Periasamy is the Director of both the Corporate Debtor and the Appellant. Both the companies are, therefore, run under the same management. The Appellant was created only for the sake of convenience in the hotel business run by the Corporate Debtor.

  • b. In its commercial wisdom, the CoC decided not to pay anything to the Appellant as it is a related party to the Corporate Debtor.

 

# 167. Judgement of Hon’ble Supreme Court in Pratap Technocrats (supra) Hon’ble Supreme Court is misplaced in this case because it does not deal with the issue of discrimination. It is explicitly laid down that in the process of Approval of Resolution Plan the RP’s role is to present to the CoC, for its approval, such Resolution Plans which conform to the conditions specified in sub-section (2) of Section 30. The approval of the Resolution Plan is a statutory function entrusted to the CoC under Sub-section (4) of Section 30. The CoC may approve a Resolution Plan with a voting percentage of not less than 66% of the voting shares of Financial Creditors after considering:

  • (i) its feasibility and viability;

  • (ii) the manner of distribution proposed having regard to the order of priority amongst creditors laid down in Section 53(1) IBC, including priority and value of the security interest of the secured creditors; and

  • (iii) such other requirements as may be specified by India’s Insolvency and Bankruptcy Board. In other words, the decision to approve a resolution plan is entrusted to the CoC with the rider that Plan has taken care of the priority given u/s 53(1) of the Code.

 

In the instant case, the approved plan does not conform to the order of priority provided u/s 53 (1) of the Code. It provides nil value to related party Financial and Operational Creditors. Sec 53 of the Code is given as under for ready reference;

  • 53. Distribution of assets.—(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely—

  • XXXX

  • Explanation.—For the purpose of this section—

  • (i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in 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).

 

# 172. It is also necessary to point out that code is a self-contained code. Therefore, any provision that restricts related-party Financial Or Operational Creditor actions is stated in the code. Thus, the Adjudicating Authority / NCLT/NCLAT cannot further limit the rights of Related Party Financial or Operational Creditors by way of interpretation. Furthermore, restrictions on the related party rights under CIRP under Code and Regulation are provided at different places. Therefore, its scope cannot be exceeded further by way of interpretation.

 

# 173. Thus, it is clear that IBC treats related parties as a separate category for specified purposes, excluding from the CoC under Section 21 and disqualifying them from being Resolution Applicants under section 29A. However, the IBC does not treat Related Party as a separate class for any other purpose. Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification. Therefore, the Related Party financial or operational creditor cannot be discriminated against under the Resolution Plan, denying their right to get payments under the Resolution Plan only on being a Related Party. It is also made clear that by getting only payment under the Resolution Plan, related party creditors could in no way sabotage the CIRP.

 

CONCLUSION

# 174. The increase in RP fees with retrospective effect can not be considered as CoC’s prudent decision. The possibility of an impact on the decision of RP for the submission of the Resolution Plan before the Adjudicating Authority for approval, even without the approval of CoC, cannot be ruled out. Submission of the Resolution Plan for Approval before the Adjudicating Authority violates the statutory provision of Section 30(2) &(3) of the Code and has vitiated the entire CIRP and made the Resolution Plan Void ab initio.

 

175. Further, Adjudicating Authority observation that Regulation 35 of the IBBI (IRPCP) Regulations 2016 contemplates sharing of only fair value and liquidation value figures on obtaining confidentiality undertaking from the members of the CoC is incorrect. Finding that Since the Promoter is not a member of the CoC, the values were shared with the Promoter and that there are no requirements under the law for the RP to share the valuation report is also erroneous.

 

176. A valuation consisting of mere naked values without a detailed report is not valid. It is a settled proposition that the Valuation exercise is conducted to facilitate the CoC’s decision-making process. Therefore, the existence of a valid and accurate valuation report is a sine qua non for the COC to exercise its commercial wisdom. A natural sequitur to those above would be that a detailed valuation report is necessary for the CoC to exercise its commercial wisdom objectively.

 

# 177. The Adjudicating Authority’s observation that a statutory provision regulating a matter of practice or procedure will generally be read as a directory and not mandatory is erroneous. Compliance with statutory requirements in regulating a matter of practice and procedure are mandatory. The Tribunal is a creature of statute, and by interpretation, it cannot dilute the statutory compliances.

 

# 178. Further, observation of the Adjudicating Authority that procedural irregularities in relation to the conduct of the proceedings in relation to the CoC will not be material when the objectors failed to establish prejudice caused to them in respect of the same is also erroneous.

 

# 179. Regulation 36(2) of CIRP Regulations provides the mandatory condition for publication of ‘Form-G’ on the Corporate Debtor’s website and the website designated by the Board for the purpose. Non-publication of notices of Form G is a material irregularity in exercise of the powers by Resolution Professional during the Corporate Insolvency Resolution period. In the instant case, there has been a material irregularity in exercising the powers by Resolution Professional during the Corporate Insolvency Resolution Process.

 

# 180. Since the said Trust (Prospective Resolution Applicant) ‘Sri Balaji Vidyapeeth’ has already been declared as ineligible, the 2nd Respondent (SRA) cannot be permitted to act as its alter ego in implementing the Resolution Plan and attain any financial advantage or gain, which is barred by Section 88 of the Indian Trusts Act.

 

# 181. The Resolution Professional made an incorrect statement that the revised Resolution Plan was approved at the 9th COC meeting. The revised Resolution Plan was not approved on 22 January 2021. After 22nd January 2021, based on the COC Resolution Dt.22.1.2021, the Resolution Plan was further modified, and the final Revised Resolution Plan dated 25 January 2021 was never laid before the CoC for approval. Thus the approval of the Resolution Plan by the Adjudicating Authority can not be treated as valid under Sec. 31(1) of the I & B Code, 2016.

 

# 182. However, the IBC does not treat Related Party as a separate class for any other purpose. Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification. Therefore, Related Party Financial or Operational Creditor cannot be discriminated under the Resolution Plan only on being a Related Party.

 

# 183. Based on the discussion above, it is clear that IBC treats related parties as a separate category for specified purposes, excluding from the CoC under Section 21 and disqualifying them from being Resolution Applicants under Section 29A. However, the IBC does not treat Related Party as a separate class for any other purpose. Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification.

 

# 184. Therefore, the Related Party financial or operational creditor cannot be discriminated against under the Resolution Plan, denying their right to get payments under the resolution Plan only on being a Related Party. It is also made clear that by getting only payment under the Resolution Plan, related party creditors could in no way sabotage the CIRP.


# 185. Based on the above discussion, it is clear that the approved Resolution Plan is in contravention of Section 30 (2) of the Insolvency and Bankruptcy Code 2016, which contravenes the provision of law


ORDER

Company Appeals (AT)(CH) (Ins.) Nos. 164, 176, 218 & 219 of 2021 are allowed.

The Common order passed in Miscellaneous Applications, IA/150/CHE/2021, MA/13/CHE/2021,MA/18/CHE/2021,MA/48/CHE/2021, IA/181/CHE/2021, IA/183/CHE/2021, IA/192/CHE/2021,IA/217/CHE/2021,IA/172/CHE/2021, IA/291/CHE/2021, IA/572/CHE/2021, IA/571/CHE/2021 passed in Company Appeal in IBA/ 1459 of 2021, dated 15 July 2021, approving the Resolution Plan is set aside. Resolution Professional is directed to proceed with the CIRP from the publication stage of Form ‘G’ for inviting Expression of Interest afresh as per CIRP Regulations. RP is directed to put up the Appellant/Promoters Settlement proposal for consideration before the CoC.

 

The Resolution Professional is directed to call the CoC within 15 days from the date of order and settlement proposal should be put to the vote and if approved with 90% vote share of the Committee of Creditors, then proceeding for withdrawal of the CIRP under Section 12 A read with Regulation 30A of CIRP Regulation.

 

Further, it is declared that the claim of related party Financial/Operational Creditor cannot be discriminated from unrelated Financial/Operational Creditors.

 

In the circumstances stated above, the time taken in the Appeal may be excluded for computation of the CIRP period. No order as to cost.


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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.