NCLAT (04.07.2022) in Avantha Holdings Ltd. Vs. Mr. Abhilash Lal, RP for Jhabua Power Ltd. [Company Appeal (AT) (Insolvency) No. 304 of 2022] held that;
As explained above, the stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages.
Proposing a scheme of compromise or arrangement under Section 230 of the 2013 Act, while the company is undergoing liquidation under the provisions of the IBC lies in a similar continuum. Thus, the prohibitions that apply in the former situations must naturally also attach to the latter to ensure that like situations are treated equally.
Section 12A proposal cannot be forced upon the lenders. The Promoters, who led to insolvency process of Corporate Debtor cannot claim to submit a Resolution Plan indirectly by way of proposal under Section 12A and ask the lenders to evaluate their Resolution Plan.
The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of CoC much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors.
The legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority. That is made nonjusticiable.
The statutory provision under Section 29A, sub-clause (c) is plain and clear that grace period of one year has been given and if after expiry of grace period, Resolution Applicant is unable to pay the dues and the NPA continues, the Resolution Applicant becomes ineligible.
We, thus, are of the view that date of NPA classification by the Canara bank shall be treated as 21.05.2018 and it cannot be taken as on 01.04.2009, which is the backdate, as has been given by the Canara Bank, with effect from which date NPA is declared.
Excerpts of the order;
This Appeal has been filed against order dated 08.03.2022 passed by the National Company Law Tribunal, Kolkata Bench, Kolkata rejecting the IA (IB) No.537/KB/2021 filed by the Appellant seeking disqualification of the Successful Resolution Applicant under Section 29A of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”) and further praying to set-aside decision of the Committee of Creditors (“CoC”) rejecting the proposal of the Appellant.
# 2. The Appellant No.1 Avantha Holdings Limited, is the Promoter and Shareholder of Avanta Power and Infrastructure Limited, which in turn hold 17.9% shares of Corporate Debtor (Jhabua Power Limited). The Appellants, Promoter of Corporate Debtor aggrieved by the order dated 08.03.2022 have come up in this Appeal. Brief facts of the case and sequence of events necessary to be noted for deciding this Appeal are:
(i) On an Application filed by FLSmidth Private Limited under Section 9 of the Code, Adjudicating Authority vide its order dated 27.03.2019 initiated Corporate Insolvency Resolution Process (“CIRP”) of Jhabua Power Limited. Mr. Abhilash Lal was appointed as Resolution Professional.
(ii) The Appellant on 03.06.2019 submitted a One Time Settlement (“OTS”) offer to the Resolution Professional, which was considered by CoC and was not found prudent and commercially viable. Resolution Professional invited Expression of Interest (“EOI”) from prospective Resolution Applicants for submission of Resolution Plan vide advertisement dated 19.08.2019. The process document was issued on 01.10.2019 to the prospective Resolution Applicants, inviting Resolution Plans. Last date for submission of Resolution Plans was 31.12.2019.
(iii) An affidavit certifying its eligibility under Section 29A was submitted by NTPC on 22.10.2019. On 06.12.2019, NTPC has informed Resolution Professional that Ratnagiri Gas and Power Private Limited (hereinafter referred as the “RGPPL”) and Konkan LNG Private Limited (hereinafter referred as the “KLL”), which were joint ventures of NTPC, have been declared Non-profitable Asset (“NPA”). The NTPC submitted Resolution Plan on 30.12.2019. The other Resolution Applicant, that is, Adani Power Limited (“Adani”) had also submitted its Resolution Plan.
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(xviii) Replies were filed to the disqualification application filed by the Appellant before the Adjudicating Authority and Adjudicating Authority vide its order dated 08.03.2021 rejected the I.A. No.537 of 2021 filed by the Appellant and held that the NTPC is not disqualified under Section 29A of the Code.
Aggrieved by the order passed by the Adjudicating Authority, this Appeal has been filed.
# 8. We have considered the submission of learned Counsel for the parties and have perused the record.
# 9. We may first consider the submission of the Appellant regarding Restructuring Settlement Plan claimed to be submitted under Section 12A.
# 10. The Appellant submitted Restructuring/ Settlement offer on 25.01.2021 by way of letter dated 25.01.2021 to the RP, requesting him to place the proposal before the CoC. The Restructuring Settlement Plan of the Appellant is claimed to be submitted under Section 12A. We may first notice at this stage that Section 12A is a provision in Code, which permits withdrawal of Application under Section 7, 9 and 10, on an Application made by the Appellant with the approval of 90% voting share of the Committee of Creditors. Section 12A is as follows:
“12A. Withdrawal of application admitted under section 7, 9 or 10. – The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.”
# 11. Section 12A does not entitle Promoters of the Corporate Debtor to submit a Settlement Plan as is claimed by the Appellant. The Appellant has claimed before the Adjudicating Authority that the Settlement Plan submitted by the Appellant had not been considered by the CoC by any application of mind and it has been arbitrarily rejected. The pre-condition of accepting any withdrawal Application under Section 12A is on approval by CoC by 90% of its voting shares. CoC having never granted its approval, Section 12A route was never open for withdrawal of CIRP. Furthermore, Section 12A proposal submitted by the Appellant was examined by the CoC in its meeting dated 05.03.2021. It is useful to notice the Minutes of the 12th Meeting of the CoC, where it did not agree with the withdrawal Application under Section 12A and following observations have been noted by the CoC:
“RP requested comments from the CoC members in the matter of the proposal forwarded by Mr. B. Hariharan, Director of Avantha Holdings Limited to the RP and some members of CoC (circulated to all members by RP upon receipt). The representatives of PFC submitted that the proposal submitted by the promoters does not conform with Sec 12A of the IBC and the same should be noted in the hearing on the next date of hearing. This was agreed to by other members of the CoC who voiced a unanimous view that they do not want to pursue any withdrawal under Section 12A or go ahead with the proposal submitted by the promoters. The same was take on record.”
# 12. Further, in 14th CoC Meeting held on 21.04.2021 the CoC again examined the proposal of Settlement Plan submitted by Promoters in Agenda Item No.7. Following observations have been made by the CoC:
“Agenda A7: To discuss the proposal submitted by the promoters of the corporate debtor RP team presented the contours of the restructuring proposal submitted by the promoters M/s Avantha Holdings Ltd.
This proposal submitted by the promoters was discussed pursuant to NCLT directions, and after due consideration, the CoC members from PFC, SBI, Axis Bank, PNB and REC stated that they do not consider the plan submitted by promoters to be commercially viable as the upfront payment is only INR 100 Cr, which is significantly lower than NTPC’s offer. Majority of the sustainable debt payment is over a long period of 19 years and unsustainable portion of the debt is at negligible rate of interest and payable after 15 years over 5 yearly instalments. Having considered the commercials of NTPC offer and promoter proposal, it was noted that the offer from NTPC is better than the promoter proposal. Some of the CoC members also noted that some other accounts held by the promoters are under examination by various Govt. authorities/ commissions. The CoC counsel clarified that if the promoter plan is a resolution plan under the IBC, then it has potential section 29A issues and if it is a plan under 12A of IBC, then it is not in prescribed form and does not meet the requirements of 12A. RP counsel agreed that it is neither in the prescribed format nor routed through the lenders along with BG. In any event, CoC considered the commercials aspects of the proposal and have found it to unacceptable.
CoC members also informed RP that lenders have not received any formal request from Promoters under Section 12A for withdrawal of application and moreover lenders are not keen on withdrawal from the CIRP in case the plan is offered by the Promoters to the lenders to consider under Section 12a. Based on these points, the CoC unanimously decided not to pursue the restructuring plan further.”
# 13. The above consideration by CoC clearly indicates that CoC has duly considered the proposal submitted by the Appellants, that is, Promoters of the Corporate Debtor and declined its consent to such proposal on high threshold, that is, 90% of CoC members rejected through vote.
# 14. The Hon’ble Supreme Court in Arun Kumar Jagatramka vs. Jindal Steel & Power Ltd. – (2021) 7 SCC 474, laid down the following:-
“An argument has also been advanced by the appellants and the petitioners that attaching the ineligibilities under Section 29-A and Section 35(1)(f) IBC to a scheme of compromise and arrangement under Section 230 of the 2013 Act would be violative of Article 14 of the Constitution as the appellant would be “deemed ineligible” to submit a proposal under Section 230 of the 2013 Act. We find no merit in this contention. As explained above, the stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages. Proposing a scheme of compromise or arrangement under Section 230 of the 2013 Act, while the company is undergoing liquidation under the provisions of the IBC lies in a similar continuum. Thus, the prohibitions that apply in the former situations must naturally also attach to the latter to ensure that like situations are treated equally.”
# 15. We are of the considered opinion that Section 12A proposal cannot be forced upon the lenders. The Promoters, who led to insolvency process of Corporate Debtor cannot claim to submit a Resolution Plan indirectly by way of proposal under Section 12A and ask the lenders to evaluate their Resolution Plan. Something which is not permissible directly by virtue of prohibition under Section 29A for submitting Resolution Plan by the Promoters, cannot be permitted to be done indirectly. Further, the commercial wisdom of the CoC, which is reflected in its Meeting dated 05.03.2021 and 21.04.2021 is not liable to be judicially reviewed.
# 16. We may also refer to the judgment of the Hon’ble Supreme Court in K. Sashidhar vs. Indian Overseas Bank & Ors. – (2019) 12 SCC 150 where following has been laid down
“52. As aforesaid, upon receipt of a “rejected” resolution plan the adjudicating authority (NCLT) is not expected to do anything more; but is obligated to initiate liquidation process under Section 33(1) of the I&B Code. The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of CoC much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. From the legislative history and the background in which the I&B Code has been enacted, it is noticed that a completely new approach has been adopted for speeding up the recovery of the debt due from the defaulting companies. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory. In the earlier regime, the corporate debtor could indefinitely continue to enjoy the protection given under Section 22 of the Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. Besides, the commercial wisdom of CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I&B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject-matter expressed by them after due deliberations in CoC meetings through voting, as per voting shares, is a collective business decision. The legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority. That is made nonjusticiable.”
# 17. We, thus, are of the view that there is no error in rejection of the proposal submitted by the Appellant claimed to be under Section 12A by the CoC, after due consideration and the Adjudicating Authority has rightly refused to interfere with the commercial decision of the CoC in I.A. No.537 of 2021 filed by the Appellants praying for setting aside the decision of the CoC rejecting their proposal.
# 18. Now we come to the submission of the parties regarding ineligibility of the NTPC to submit the Resolution Plan. As noted above, the submission, which has been advanced by Dr. Singhvi attracting the eligibility of NTPC is that eligibility of the Resolution Applicant has to be looked into at the time of submission of Resolution Plan on 30.12.2019, which is called as a First Plan. It is submitted that a Resolution Applicant, who is ineligible on the date, when he submits the Resolution Plan, all subsequent process regarding consideration of the Plan is vitiated and cannot enure to the benefit of Resolution Applicant. Shri Ramji Srinivasan, learned Senior Counsel appearing for Resolution Applicant has emphatically submitted that on the day when Resolution Applicant submitted the Resolution Plan, that is, on 30.12.2019, it was not ineligible under Section 29A, sub-clause (c). We, thus, proceed to examine the submission as to whether the Resolution Applicant was eligible on 30.12.2019 when it submitted the first Resolution Plan.
# 19. As noted above, the Resolution Applicant as per the invitation of submission of Resolution Plan was by 31.12.2019 and process documents was issued on 01.10.2019, the Resolution Applicant, that is, NTPC as well as another Resolution Applicant Adani Power Limited have submitted their Resolution Plans by 30.12.2019. The ineligibility of the Resolution Applicant is sought to be questioned on the strength of Section 29A(c) and (j), Explanation (1). The relevant provisions of Section 29A are as follows:
“29A. Persons not eligible to be resolution applicant. – A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person—
(c) at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with 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 a period of 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:
Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to nonperforming asset accounts before submission of resolution plan:
Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor.
Explanation I.- For the purposes of this proviso, the expression “related party” shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be prescribed, prior to the insolvency commencement date.
Explanation II.— For the purposes of this clause, where a resolution applicant has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset and such account was acquired pursuant to a prior resolution plan approved under this Code, then, the provisions of this clause shall not apply to such resolution applicant for a period of three years from the date of approval of such resolution plan by the Adjudicating Authority under this Code;
(j) has a connected person not eligible under clauses (a) to (i).
Explanation[I]. — For the purposes of this clause, the expression “connected person” means—
(i) any person who is the promoter or in the management or control of the resolution applicant; or
(ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or
(iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii):
Provided that nothing in clause (iii) of Explanation I shall apply to a resolution applicant where such applicant is a financial entity and is not a related party of the corporate debtor:
# 23. From the date of the NPA classification, as noted above in Tabular Form, it is clear that classification of NPA of RGPPL and KLL by SBI and IDBI were on 21.05.2018. The first classification of NPA by the Canara Bank on 21.05.2018 was with effect from 01.04.2009. The submission, which has been pressed by Shri Ramaji Srinivasan is that classification date being 21.05.2018 and from that classification date the period of one year has not elapsed on 27.03.2019, when the CIRP of the Corporate Debtor commenced, hence, there is no disqualification under Section 29A(c). If we take the date 21.05.2018 as the date declared for classification of NPA, one year period has not elapsed on 27.03.2019, but the submission of Appellant is that the classification although declared on 21.05.2018, it was with effect from 01.04.2009 and more than one year period had elapsed, thus, the submission of Resolution Applicant (NTPC) that it was eligible under Section 29A(c) is to be rejected.
# 24. What is the purpose and object of expression in the statute that at least a period of one year has elapsed from the date of such classification, as appearing in Section 29A, sub-clause (c) falls for consideration and interpretation in this Appeal.
# 25. The Hon’ble Supreme Court in Swiss Ribbons Private Limited and another vs. Union of India and Others – (2019) 4 SCC 17 in paragraph 105 has noticed:
“105. …..As a matter of legislative policy, therefore, quite apart from malfeasance, if a person is unable to repay a loan taken, in whole or in part, within this period of one year and three months (which, in any case, is after an earlier period where the corporate debtor and its financial creditors sit together to resolve defaults that continue), it is stated to be ineligible to become a resolution applicant. The reason is not far to see. A person who cannot service a debt for the aforesaid period is obviously a person who is ailing itself. The saying of Jesus comes to mind — “if the blind lead the blind, both shall fall into the ditch.” The legislative policy, therefore, is that a person who is unable to service its own debt beyond the grace period referred to above, is unfit to be eligible to become a resolution applicant. This policy cannot be found fault with. Neither can the period of one year be found fault with, as this is a policy matter decided by RBI and which emerges from its Master Circular, as during this period, an NPA is classified as a substandard asset. The ineligibility attaches only after this one year period is over as the NPA now gets classified as a doubtful asset.”
# 26. The statutory provision under Section 29A, sub-clause (c) is plain and clear that grace period of one year has been given and if after expiry of grace period, Resolution Applicant is unable to pay the dues and the NPA continues, the Resolution Applicant becomes ineligible. The question to be answered in the present case is as to what shall be the date of classification of NPA by Canara Bank, whether it is 21.05.2018 or 01.04.2009. From the materials on record, it is clear that classification was declared on 21.05.2018, although with effect from 01.04.2009. So, the date on which classification is declared is relevant or the date with effect from such classification is made to be effective is relevant for the purpose of 29A(c), is the straight question to be answered. The purpose of date of “such classification” is that from the date of such classification, within grace period, that is, one year, if one year period has expired and NPA still continues, the Resolution Applicant is ineligible. From reverting to the facts of the present case, the NPA classification was declared on 21.05.2018 with effect from 01.04.2009. So, 01.04.2009 is the backdate which has been given by Canara Bank, but actual date of classification is 21.05.2018. If we take the backdate as the date of classification, the purpose and object for giving the grace period will not be fulfilled. If date of classification is declared as a date which is nine years ago, there is no question of a Resolution Applicant to take any benefit of the grace period of one year. The purpose for statutory requirement that at least one year has elapsed from the date of such classification is to see that within a period of one year from classification, if the Resolution Applicant did not get away from NPA, it should be declared as NPA. But in case where the Resolution Applicant does not actually get the grace period whether by a backdate, which is of nine years ago, it can be denied the benefit of the expression statutory requirement of “at least period of one year has elapsed from the date of such classification”. We, thus, are of the view that date of NPA classification by the Canara bank shall be treated as 21.05.2018 and it cannot be taken as on 01.04.2009, which is the backdate, as has been given by the Canara Bank, with effect from which date NPA is declared. If the interpretation as put by learned Counsel for the Appellant is accepted, the purpose of statutory prescription under Section 29A(c) can be defeated by the Financial Institutions by declaring NPA on particular date and making it effective from back date, so that no Resolution Applicant can take the benefit of statutory provision as provided under Section 29A(c). We, thus, have to take the date of 21.05.2018, as the date of NPA classification by the Canara Bank. Similarly, the NPA classification by SBI and IDBI Bank are all subsequent to 21.05.2018, that is, in the year 2019. We, thus, have to take date of classification as 21.05.2018 on which date the Resolution Applicant was classified as NPA and the period of one year had not elapsed till 27.03.2019, when CIRP commenced. Since on the date of commencement of CIRP, period of one year has not elapsed, the disqualification under Section 29A(c) shall not attach to the NTPC, who was Resolution Applicant. We, thus, accept the submission of learned Senior Counsel for the Resolution Applicant that Resolution Applicant was eligible on 30.12.2019 when it submitted the Resolution Plan. When Resolution Applicant was eligible on 30.12.2019, it continued to be eligible in entire process of the CIRP. The CoC, which is statutorily authorised to conduct the CIRP with the object of reviving the Corporate Debtor is fully competent to ask the Resolution Applicant to revise its Plan, improve its Plan and submit the revised Resolution Plan.
# 27. The Hon’ble Supreme Court in Kalpraj Dharamshi & Anr vs. Kotak Investment Advisors (2021) SCC OnLine SC 204 has held that CoC is competent to suggest modification to the prospective Resolution Applicant. Following observations has been made by the Hon’ble Supreme Court in the judgment:
“This Court held, that what is left to the majority decision of CoC is the “feasibility and viability” of a resolution plan, which is required to take into account all aspects of the plan, including the manner of distribution of funds among the various classes of creditors. It has further been held, that CoC is entitled to suggest a modification to the prospective resolution applicant, so that carrying on the business of the corporate debtor does not become impossible, which suggestion may, in turn, be accepted by the resolution applicant with a consequent modification as to distribution of funds, etc. It has been held, that what is important is, the commercial wisdom of the majority of creditors, which is to determine, through negotiation with the prospective resolution applicant, as to how and in what manner the corporate resolution process is to take place.”
# 28. When we have found that the Resolution Applicant was eligible on 30.11.2019 when it submitted the first Resolution Plan, we see no necessity to enter into other submission raised by learned Counsel for the parties including the submission regarding applicability of the proviso to Section 29A(c). The Resolution Applicant being eligible, was entitled to submit Resolution Plan and was also entitled to revise its Plan from time to time as per the Scheme of the Code. The Plan having approved by 100% vote of CoC, we do not find any error in the decision of the Adjudicating Authority rejecting the I.A. No.537 of 2021 filed by the Appellant.
# 29. For the reasons as indicated above, we thus, are of the view that Adjudicating Authority has rightly rejected the I.A. No.537 of 2021 seeking disqualification of the Resolution Applicant as well as praying for setting aside the decision of CoC rejecting the proposal of Appellant under Section 12A. Decision of the Adjudicating Authority on both the counts finds our approval. We, thus, do not find any merit in the Appeal. The Appeal is dismissed. No order as to costs.
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