NCLAT (12.04.2022) in M/s. Rana Saria Poly Pack Pvt. Ltd. Vs. Uniworld Sugars Pvt. Ltd. [Company Appeal (AT) (Ins.) No. 422 & 741 of 2021 ] Held that;.
Thus, we note that the appointment of the registered valuers is to be done in accordance with the stipulated procedure in the CIRP Regulations and also how the fair and liquidation value will be estimated and later communicated to the members of CoC.
Furthermore, we also note that a third valuation has to be undertaken in the event two estimates of valuations are significantly different, whereupon the Resolution Professional may appoint a third registered valuer.
We note that under the CIRP Regulations no power has been given to CoC to call for any valuation of fair and liquidation value though we don’t think there is any bar under IBC provisions for the CoC to call for a fresh valuation report.
Assuming that the CoC were to call for a valuation report to assist itself in the decision making, we are of the opinion that the procedure and process as outlined in regulations 27 and 35 ought to be followed.
Further, the third valuation under regulation 35 is required only if the two estimates of fair and liquidation value obtained earlier are significantly different.
Such check and balance in the appointment of registered valuers and estimation of fair and liquidation value in the CIRP Regulations to ensure that these valuations that form the basis of various provisions under the resolution plan are as close to the correct estimations as possible.
The explanation could have been obtained from the three valuers since they had carried out the valuation exercise and would be in a position to explain the methodology and reason for divergence in values.
Since the liquidation value forms the basis of deciding the inter se` payments to creditors it requires that the valuation exercise be undertaken with absolute impartiality.
Hence, in our view the relevance and application of Regulations 27 and 35 are pertinent in the process of appointment of valuers and for establishing the need for a fresh valuation.
The quantum of liquidation value is relevant when deciding the payments to operational creditors under section 30(2)(b) of the IBC.
Hence, the correct liquidation value of the corporate debtor assumes significance insofar as payments towards stakeholders and creditors are concerned.
Excerpts of the order;
# 4. The Learned Counsel for Appellant/Rana Saria Poly Pack Pvt. Ltd. has argued that a resolution plan, based on an erroneous and undervalued liquidation value, was presented by the Successful Resolution Appellant (SRA) on the basis of a third valuation report, which was obtained without following the stipulated procedure in the Insolvency and Bankruptcy Board of India (Corporate Insolvency Resolution of Corporate Persons) Regulation, 2016 (in short ‘CIRP Regulations’) and the resolution plan so obtained and approved by the Adjudicating authority is not in accordance with the legal provisions of the IBC. He has specifically mentioned Regulations 27 and 35 of CIRP Regulations to urge that the use of word “shall” means it is mandatory to follow these regulations. Furthermore, he has urged that in the first two valuations, there is no significant difference, and therefore there was no need to obtain a third valuation report, whose low valuation has been taken as the basis for formulation of the successful resolution plan. He has further argued that the Resolution Professional has followed the dictates of the Committee of Creditors (‘CoC’ in short)in obtaining a third valuation report, whereas the duty under Regulation 35 of the CIRP Regulations is cast on the Resolution Professional for obtaining valuation reports.
# 5. The Learned Counsel for Appellant has further referred to the minutes of the 20th meeting of the CoC (attached at pp.42- 51 of the Rejoinder of Appellant to Respondent No.1’s reply) to show that the members of CoC also had questions about going for a third valuation of the fair and liquidation value of corporate debtor’s assets. In particular, he has referred to the discussion noted in the minutes of the 20th CoC meeting at pp.46-48 of the Rejoinder Affidavit to show that the Resolution Professional pointed out in the meeting that he had, in an earlier 15th meeting of the CoC, apprised the members that no further fresh valuation was required to which they had consented. The minutes also note the view of Ms. Nancy Agarwal, authorized representative of Union Bank of India that under Regulation 27 of CIRP Regulations, the Resolution Professional has been given the power to obtain a third valuation report in case of major disparity in the initial two valuations and that the cost of valuation should be included in the CIRP cost. The Learned Counsel for Appellant has urged that the cost of third valuation if met by CoC members will not be in accordance with CIRP regulations, and furthermore in undertaking the third valuation only one valuer for each class, namely, (i) Securities or Financial Assets, (ii) Land and Building, and (iii) Plant and Machinery, were appointed instead of two valuers as stipulated in the CIRP Regulations.
# 20. Regulation 27 of CIRP Regulations outlines the procedure for appointment of registered valuers for determining the fair value and liquidation value of the corporate debtor. Regulation 35 provides the methodology of determining fair and liquidation value of the corporate debtor. It is laid down in the CIRP Regulations that two registered valuers should be appointed under regulation 27. These two registered valuers so appointed shall submit to the Resolution Professional an estimate of the fair value and liquidation value computed in accordance with internationally accepted valuation standards, after physical verification of the inventory and fixed assets of the corporate debtor. Further Regulation 35 stipulates that that if in the opinion of Resolution Professional, the two estimates are significantly different, the Resolution Professional may appoint another registered valuer who shall submit an estimate of the value computed in the same manner and the average of two closest estimates of a value shall be considered as the fair value or the liquidation value. These estimations shall be communicated by the Resolution Professional to the members of the CoC after the receipt of the resolution plan, after receiving an undertaking from the members that they shall maintain confidentiality of the same.
# 21. Thus, we note that the appointment of the registered valuers is to be done in accordance with the stipulated procedure in the CIRP Regulations and also how the fair and liquidation value will be estimated and later communicated to the members of CoC. Furthermore, we also note that a third valuation has to be undertaken in the event two estimates of valuations are significantly different, whereupon the Resolution Professional may appoint a third registered valuer.
# 22. Admittedly, two valuations were carried out by M/s. Jagdish Mistry and M/s. Parag Seth and the valuations obtained from them are as follows:-
# 23. We note that under the CIRP Regulations no power has been given to CoC to call for any valuation of fair and liquidation value though we don’t think there is any bar under IBC provisions for the CoC to call for a fresh valuation report. Assuming that the CoC were to call for a valuation report to assist itself in the decision making, we are of the opinion that the procedure and process as outlined in regulations 27 and 35 ought to be followed. The reasons for obtaining two valuations, we feel, is so that a single valuation should not form the basis of decision making and in case it is far off the mark the entire exercise would become defective and faulty leading to incorrect formulation of resolution plan and payments to creditors. Further, the third valuation under regulation 35 is required only if the two estimates of fair and liquidation value obtained earlier are significantly different. Such check and balance in the appointment of registered valuers and estimation of fair and liquidation value in the CIRP Regulations to ensure that these valuations that form the basis of various provisions under the resolution plan are as close to the correct estimations as possible.
# 25. In the instant case, we find that the first valuation by two registered valuers were made on 28.5.2018 and the two valuations of liquidation value were Rs.126.30 crores and Rs.121.01 crores, leading to average value of Rs.123.66 crores. We feel that even if the CoC thought it fit to get another valuation of a more recent date, it was desirable that the procedure outlined in regulations 27 and 35 should have been followed. The source of payment for valuation is not a material factor insofar as valuation figures are concerned nor will they have any impact on them. They are really disjointed activities. Moreover, in the present case the third valuation estimates the liquidation value as Rs. 52.69 crores, which is even less than half of the liquidation value estimated earlier and hence significantly different from the two earlier valuations. We therefore think that the procedure of obtaining a third valuation and then considering it as basis for deciding the payment particularly of the operational creditors under Section 30(20(b) defective and not in accordance with the stipulated norms and procedure under the CIRP Regulations.
# 26. We also note that the CoC did consider the variance between the two earlier liquidation valuation estimates and the third one and desired explanation regarding the same. The explanation could have been obtained from the three valuers since they had carried out the valuation exercise and would be in a position to explain the methodology and reason for divergence in values. It, therefore, appears surprising that rather than obtain explanation from the earlier valuers, the CEO of the erstwhile corporate debtor, who would have been an interested party and could have had a clouded opinion, was approached to provide this explanation. We do not think such an explanation would be fair and free from being coloured with possible conflict of interest. Therefore, taking it as the basis for calculating payments under the resolution plan cannot be considered as an error-free exercise.
# 27. Thus it is quite clear that the members of the CoC had concerns about the appointment of the third valuer and later about the low liquidation value in the third report. The Resolution Profession also expressed an opinion about the low liquidation value obtained in the third report.
# 28. It is thus clear from the afore-mentioned minutes of CoC meetings that members did have objection about undertaking a fresh valuation (third valuation in the present case), but eventually the issue came down to the payment of expenses in relation to fresh valuation and the main issue about whether to undertake a third valuation or not was side-stepped. It is thus a case of missing the woods for the trees. Since the liquidation value forms the basis of deciding the inter se` payments to creditors it requires that the valuation exercise be undertaken with absolute impartiality and. Hence, in our view the relevance and application of Regulations 27 and 35 are pertinent in the process of appointment of valuers and for establishing the need for a fresh valuation.
# 29. The Ld. Senior Counsel of Respondent has pointed out the observation of Hon’ble Supreme Court that a report obtained in the process of payment of insurance amount can form the basis of decision in the matter of Sri Venkateswara Syndicate vs. Oriental Insurance Company Limited and Anr. [(2009 8 Supreme Court cases 507] wherein Hon’ble Supreme Court held that:
“37. The option to accept or not to accept the report is with the insurer. However, if the rejection of the report is arbitrary and based on no acceptable reasons, the courts or other forums can definitely step in and correct the error committed by the insurer while repudiating the claim of the insured. We hasten to add, if the reports are prepared in good faith, with due application of mind and in the absence of any error or ill motive, the insurance company is not expected to reject the report of the surveyors.
# 30. The observations in the abovementioned Sri Venkateswara Syndicate judgment (Supra) is distinguished in that while it relates to obtaining a report and its relevance for payment of insurance claim, in the present case the need, procedure and methodology for obtaining a third valuation is the relevant issue.
# 31. Another contention of the Learned Sr. Counsel for Respondents is that the CoC, in its commercial wisdom, has approved the resolution plan and the liquidation value is not necessary or even relevant for formulation of the resolution plan. Such an argument does not seem to be correct because payments to the operational creditors have to be made in accordance with the provision in section 30(2)(b) of the IBC, and the calculation of amounts of payments has to be made with reference with the liquidation value and the order of priority given in section 53(1).
# 33. The relevance of liquidation value for fixing of payments to various classes of creditors is evident in the observations made in the judgment of Hon’ble Supreme Court in Pratap Technocrats (P) Ltd. & Ors. v. Monitoring Committee of Reliance Infratel Limited and Anr. [(2021) 10 Supreme Court Cases 623] wherein the following is held:-
“F Analysis
F.1 Clearing the ground
17. Before we deal with the legal submissions which have been canvassed during the course of the hearing, it is necessary to clear the ground on three factual aspects bearing on the outcome of the appeal:
Xx xx xx xx xx
(ii) Liquidation value
19. The second aspect relates to the liquidation value. On this, it has been clarified that the liquidation value due to the unsecured operational creditors would remain nil in all scenarios, including if the corpus of RFs. 800 crores is separately considered. The liquidation value of the corporate debtor is Rs.4339.58 crores. The amount being infused by the successful resolution applicant is Rs.3720 crores. The amount of Rs. 800 crores is a value ascribed under the approval resolution plan to be realized by the corporate debtor, pursuant to the remittance of proceeds in respect of the preference shares. Hence, cumulatively, the value being distributed under the approved valuation plan is Rs.4520 crores. It has been clarified that even if the liquidation value of the realisable value of the preference shares were to be considered in isolation for distribution amongst all the operational creditors, in terms of the priority contained in Section 53 (1) of the Code, the liquidation value due to the appellants would still remain at nil.”
# 34. A contention raised by the Ld. Senior Counsel of Respondents is that the judgment of Hon’ble Supreme Court in the matter of Maharashtra Seamless Ltd. vs. Padmanabhan Venkatesh and Others [(2020) 11 Supreme Court Cases 467) holds that commercial wisdom overrides the consideration on equity and payments are possible to be made below the liquidation value, wherein the following is held:- . . . . .
# 35. In essence the judgement of Hon’ble Supreme lays down that the resolution plan should be compliant of sub-section (2) of section 30. The Ld. Counsel for Appellant has sought to distinguish this judgement by pointing out that in the instant case the very sub-stratum of obtaining a fresh liquidation report and the valuation contained therein are in question, and the quantum of liquidation value is relevant when deciding the payments to operational creditors under section 30(2)(b) of the IBC.
# 36. On the issue of the commercial wisdom of CoC being of prime relevance in allocating payments under the resolution plan, the Ld. Counsel of Respondents has cited the judgement in the matter of Committee of Creditors of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta & Ors. [(2020) 8 Supreme Court Cases 531) wherein Hon’ble Supreme Court has held as following:-
“46. This is the reason why Regulation 38(1A) speaks of a resolution plan including a statement as to how it has dealt with the interests of all stakeholders, including operational creditors of the corporate debtor. Regulation 38(1) also states that the amount due to operational creditors under a resolution plan shall be given priority in payment over financial creditors. If nothing is to be paid to operational creditors, the minimum, being liquidation value – which in most cases would amount to nil after secured creditors have been paid – would certainly not balance the interest of all stakeholders or maximise the value of assets of a corporate debtor if it becomes impossible to continue running its business as a going concern. Thus, it is clear that when the Committee of Creditors exercises its commercial wisdom to arrive at a business decision to revive the corporate debtor, it must necessarily take into account these key features of the Code before it arrives at a commercial decision to pay off the dues of financial and operational creditors. There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the Committee of Creditors, but, the decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors. This being the case, judicial review of the Adjudicating Authority that the resolution plan as approved by the Committee of Creditors has met the requirements referred to in Section 30(2) would include judicial review that is mentioned in Section 30(2)(e), as the provisions of the Code are also provisions of law for the time being in force. Thus, while the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of. If the Adjudicating Authority finds, on a given set of facts, that the aforesaid parameters have not been kept in view, it may send a resolution plan back to the Committee of Creditors to re-submit such plan after satisfying the aforesaid parameters. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal.
# 37. Regarding the ‘commercial wisdom’ of CoC in approving a resolution plan Hon’ble Supreme Court has also held in its judgment dated 13.5.2021 held in the matter of India Resurgence ARC Private Limited vs. Amit Metaliks Ltd.& Another [2021 SCC Online SC 409] that the business decision taken in exercise of the commercial wisdom of Committee of Creditors cannot be interfered with unless creditors belonging to a class being similarly situated are denied fair and equitable treatment. The relevant portion of this judgment is as hereunder:
“10. As regards the process of consideration and approval of resolution plan, it is now beyond a shadow of doubt that the matter is essentially that of the commercial wisdom of Committee of Creditors and the scope of judicial review remains limited within the four-corners of Section 30(2) of the Code for the Adjudicating Authority; and Section 30(2) read with Section 61(3) for the Appellate Authority. In the case of Jaypee Kensington (supra), this Court, after taking note of the previous decisions in Essar Steel(supra) as also in K. Sashidhar v. Indian Overseas Bank and Ors.: (2019) 12 SCC 150 and Maharashtra Seamless Limited v. Padmanabhan Venkatesh and Ors.: (2020) 11 SCC 467, summarised the principles as follows:
“77. In the scheme of IBC, where approval of resolution plan is exclusively in the domain of the commercial wisdom of CoC, the scope of judicial review is correspondingly circumscribed by the provisions contained in Section 31 as regards approval of the Adjudicating Authority and in Section 32 read with Section 61 as regards the scope of appeal against the order of approval. 77.1. Such limitations on judicial review have been duly underscored by this Court in the decisions above-referred, where it has been laid down in explicit terms that the powers of the Adjudicating Authority dealing with the resolution plan do not extend to examine the correctness or otherwise of the commercial wisdom exercised by the CoC. The limited judicial review available to Adjudicating Authority lies within the four corners of Section 30(2) of the Code, which would essentially be to examine that the resolution plan does not contravene any of the provisions of law for the time being in force, it conforms to such other requirements as may be specified by the Board, and it provides for
(a) payment of insolvency resolution process costs in priority;
(b) payment of debts of operational creditors;
(c) payment of debts of dissenting financial creditors;
(d) for management of affairs of corporate debtor after approval of the resolution plan; and
(e) implementation and supervision of the resolution plan.
77.2. The limitations on the scope of judicial review are reinforced by the limited ground provided for an appeal against an order approving a resolution plan, namely, if the plan is in contravention of the provisions of any law for the time being in force; or there has been material irregularity in exercise of the powers by the resolution professional during the corporate insolvency resolution period; or the debts owed to the operational creditors have not been provided for; or the insolvency resolution process costs have not been provided for repayment in priority; or the resolution plan does not comply with any other criteria specified by the Board.
77.3. The material propositions laid down in Essar Steel (supra) on the extent of judicial review are that the Adjudicating Authority would see if CoC has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors have been taken care of. And, if the Adjudicating Authority would find on a given set of facts that the requisite parameters have not been kept in view, it may send the resolution plan back to the Committee of Creditors for resubmission after satisfying the parameters. Then, as observed in Maharashtra Seamless Ltd. (supra), there is no scope for the Adjudicating Authority or the Appellate Authority to proceed on any equitable perception or to assess the resolution plan on the basis of quantitative analysis. Thus, the treatment of any debt or asset is essentially required to be left to the collective commercial wisdom of the financial creditors.”
# 38. It is noted from the above-mentioned judgments that while ‘commercial wisdom’ of the CoC is the most important factor in the formulating and finalising a resolution plan, the commercial wisdom has to be exercised keeping in mind the key features of the IBC which would, inter alia, mean balancing the interests of the creditors which would establish the ‘viability and feasibility’ of the resolution plan.
# 39. Another issue that has been raised by the Learned Counsel for Appellant is the matter of conducting forensic audit of the corporate debtor and not placing the report of forensic audit for the consideration of the Adjudicating Authority. The matter of undertaking forensic audit was discussed by the CoC in its 20th meeting and it was conducted on the direction of the CoC. This report was received on 20.1.21 by the RP, who sent it to the creditors vide e-mail dated 8.2.2021. The Learned Counsel for Respondent has claimed that since the creditors did not raise any objection or concerns regarding the contents of the Forensic Audit report, it was not placed before the Adjudicating Authority. The Learned Counsel for Appellant has claimed that the CoC approved the resolution plan on 27.10.2020 which was subsequently submitted by the Resolution Professional for Adjudicating Authority’s approval. Hence when the Forensic Audit Report became available, the resolution plan was still under consideration of the Adjudicating Authority, and hence it was desirable that the forensic audit report should have been put before the Adjudicating Authority, more so when it contained glaring instances of omission and commission with regard to the assets of the corporate debtor which could have been recovered thereby adding to the kitty available with the corporate debtor which could have accrued to the creditors.
# 40. There is the matter of three pending applications wherein payments amounting to a total amount of Rs. 85 crores were not adjudicated by the Adjudicating Authority appropriately and were dealt with in the Impugned Order in a summary manner. . . . .
# 41. It is noted that orders on these applications were reserved by the Adjudicating Authority on 28.2.2019. But after a change of bench, the applications were heard again. It was expected that the Adjudicating Authority would pass orders on these applications before finalising the resolution plan since these applications related to recovery of approximately Rs. 85 crores from the erstwhile promoters of the corporate debtor and if these applications would have been decided in the corporate debtor’s favour they had the potential of changing the scheme of payments under the resolution plan.
# 42. The detailed discussion in aforementioned paragraphs regarding the third valuation report on fair and liquidation value and the approval of resolution plan of Rs. 54.02 crores make it clear that the quantum of liquidation value was relevant and material in allocating payments to be given to the workmen, employees and the operational creditors.
# 43. Section 30(2)(b) stipulates that the payment of debts of operational creditors should be in such a manner as may be specified by the IBBI, which shall not be less than the amount to be paid to such creditors in the event of the liquidation of the corporate debtor under section 53. Hence, the correct liquidation value of the corporate debtor assumes significance insofar as payments towards stakeholders and creditors are concerned. In order to assess the quantum of payments we disregard the third valuation of liquidation value for reasons that have been discussed extensively earlier in this judgment and assume that the liquidation value would be the average of the first two liquidation value estimations, which would be Rs. 123.66 crores. The full CIRP cost of Rs. 8 crores would be paid out of the assumed liquidation valuation of Rs.123.66 crores and Rs.115.66 crores will remain available for payment to workmen, employees, financial creditors and operational creditors. The appellant Simbhaoli Sugars has raised the issue of payments to creditors in its appeal.
# 44. After careful consideration of the rival submissions of the parties and the record and as per detailed discussion and analysis, we are of the view that the third valuation report of fair and liquidation should be discarded as it is not in accordance with the stipulated provision and procedure in the CIRP Regulations, and moreover the wide variance of the liquidation value of the third valuation report from the first two valuation reports also necessitates discarding of the third valuation report. Therefore, the average liquidation value of first two valuations viz. Rs. 123.66 crores should be the liquidation value on which various payments in the resolution plan should be based upon.
# 45. It is noted that the successful resolution plan was approved by the Adjudicating Authority on 17.3.2021 and it is now more than a year since the SRA has stepped in the shoes of the corporate debtor and has taken up implementation of the resolution plan. Hence it would serve the interests of the creditors and stakeholders in a fair and just manner if the SRA revises the payments to be given to stakeholders and creditors resolution plan in the light of the liquidation value of Rs. 123.66 crores and puts it up to the CoC for consideration and necessary approvals.
# 46. We, therefore, set aside the impugned order and the resolution plan only to the extent it relates to allocation of payments to the stakeholders and creditors and direct that the revision of payments and subsequent approval of the revised resolution plan should be completed within a period of two months from the date of this judgment.
# 47. We may also add that the pending applications, namely CA Nos. 235/2018, 236/2018 and 237/2018 and any other application which pertains to recovery of amounts and which could not be properly considered and adjudicated upon, should also be disposed of, preferably in the next two months, and any monies accrued in the kitty of the corporate debtor should be taken as adding to the liquidation value of the corporate debtor and to be utilized for payments to the creditors and stakeholders.
# 48. With the above-stated directions we dispose of these appeals. The parties shall bear their own costs.
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