Amit Gupta Vs. Anil Kohli - The Successful Resolution Applicant is eligible to have encumbrance free transfer of the assets of the Corporate Debtor after the approval of the Resolution Plan.

 NCLT Mumbai-II (11.11.2019) in Amit Gupta  Vs. Anil Kohli  (IA No. 2847, 2666 & 2685 of 2021 In CP/IB/MB/No. 1138 of 2017) held that;

• The Successful Resolution Applicant is eligible to have encumbrance free transfer of the assets of the Corporate Debtor after the approval of the Resolution Plan. 

Excerpts of the order;

# 1. The present Application is filed by the Applicant i.e. the successful Resolution Applicant seeking following prayers :- 

• a. To direct the Respondent/Monitoring Professional to handover the complete control over the Corporate Debtor to the Applicant being the Successful Resolution Applicant forthwith including the right to operate the Bank Accounts of the Corporate Debtor; 

• b. To reduce the Professional fee of the Respondent/Monitoring Professional to Rs. 25,000/- per month; 

• c. Or in alternative to prayer ©, Substitute the Monitoring Professional who can charge Rs. 25,000 per month; 

• d. Pass any other or such further order(s) as this Hon’ble Tribunal may deem fit and proper in the facts and circumstances of the case and in the interest of justice; 

 

Submissions of the Applicant are as follows:- 

# 2. The Resolution Plan of the Applicant was approved vide Order dated 26.11.2019. The Order wrongly mentioned the time for the payment under the Resolution Plan as 30 months instead of 3 months. Thereafter the Resolution Professional approached the Tribunal for rectification of the Order dated 26.11.2019 without making the Applicant herein as the party to the said Application. It was only on 11.02.2020, the Applicant came to know of the said rectification of the Order. 

 

# 3. Thereafter, the Applicant filed an Application being IA 661 of 2020 for extension of time for making the payment. There were attachments/liens/encumbrances on the assets of the Corporate Debtor. Further, the Applicant filed another Application being 1327 of 2020 requesting that the Applicant may be permitted to pay amount under the Plan within two months from lifting of attachments/encumbrances. The said two Applications were decided vide Order dated 30.04.2021. the Tribunal was pleased to direct the Applicant to pay interest @ 12% from the date of the amount becoming due. The Applicant filed an appeal being aggrieved by levy of interest and shifting obligations to remove the attachments on the Applicant. The said subject matter of appeal is sub judice before Hon’ble NCLAT. 

 

# 4. Further, the Respondent itself in its reply has accepted the fact that the entire payment has been made by the Applicant as per the Resolution Plan. Therefore, the Applicant was entitled to receive the handover of complete control of the Corporate Debtor. However, the Respondent failed to do so. 

 

# 5. Further the Applicant has also filed an Affidavit cum undertaking dated 14.01.2022 wherein the Applicant has undertaken to pay interest in accordance with the Order dated 30.04.2021 passed by this Tribunal subject to final outcome of Appeal pending before Hon’ble NCLAT. Hence, nothing remains on the part of the Respondent to object the prayer of the Applicant. 

 

# 6. Another issue raised by the Applicant is that the Applicant is entitled to get the assets of the Corporate Debtor free from encumbrances. The assets of the Corporate Debtor are under attachments of ED, MPID Court etc. The Resolution Professional has not taken any effective steps for lifting the attachments and also reflects that no work has been undertaken by the Resolution Professional as he was responsible to lift the attachments and has only conducted one meeting each year in 4 consecutive years and has been charging an exorbitant fee of Rs. 5.5 Lakhs per month exclusive of GST. 

 

# 7. The Applicant has paid the entire payment of Rs. 87.10 Crores in accordance with the terms of the Resolution Plan. The Applicant states that the Applicant is entitled for complete control of the management as well as the operations of the Corporate Debtor. Further on the payment of the entire amount under the Resolution Plan, the Applicant cannot be made to wait for an indefinite period for the sake of Monitoring Professionals undue gain of approximately Rs. 6.49 Lakh per month. 

 

# 8. The fees of the Resolution Professional is unreasonable and also does not reflect the work done in by four years also as enumerated above. This is leading to the fate of the already distressed Company into Liquidation at the fault of the Resolution Professional. The Resolution Professional has conducted only four meetings from 2019 till 2022 i.e. only one meeting in each year. The last meeting conducted on 21.01.2022 was convened only to seek time with an intention to prolong the matter as nothing conclusive resulted from the said meeting. 

 

# 9. The Respondent also does not provide the copy of minutes to the Applicant. The Respondent is charging an unreasonable amount parallel to the amount of work done. 

 

# 10. Further in a recent judgement in “Devarajan Raman vs. Bank of India Limited” the Supreme Court has observed; - 

• “15. The Insolvency and Bankruptcy Board of India has issued a circular on 12 June 2018. The circular, inter alia, requires the insolvency professional to ensure that the fees payable to him during the CIRP are reasonable and the approval of the CoC for the fee or other expenses is obtained, wherever approval is required. “ 

• “16. The appellate authority has merely proceeded in an ad hoc manner on the ground that the amount of Rs. 5,00,000 as fee, in addition to the expenses, appears to be reasonable. Both the orders suffer from an abdication in the exercise of jurisdiction. In the absence of any reasons either in the order of the NCLT or the appellate authority, it is impossible for the Court to deduce the basis on which the payment of an amount of Rs. 5,00,000 together with expenses has been found to be reasonable.” 

 

Submissions of the Respondent are as follows :- 

# 11. The Respondent states that the Order for approval of Resolution Plan was passed on 26.11.2019 and the order inadvertently recorded 30 months instead of 3 months to make payment under the Resolution Plan. 

 

# 12. Further taking advantage of such inadvertent error, the Applicant filed an Application IA 661 of 2020 praying that the time to make payment under the Resolution Plan be reckoned from 27.01.2020 i.e. the date on which the Order was rectified. 

 

# 13. That due to covid-19 pandemic and implementation of lockdown by the Central Government, the functioning of the Tribunal was affected. Thereafter, the Order was pronounced on 30.04.2021. Vide the said Order the prayer sought by the Applicant was partly allowed and time period to make complete payment in terms of the approved Resolution Plan subject to payment of interest at a commercial rate of 12% from the reckoned date i.e. 27.01.2020 till the entire payment is made. 

 

# 14. Further it was made clear that the payment of interest is the condition precedent to the extension of time for making payment which was not honoured by the Applicant. The Order dated 30.04.2021 is not complied with by the Applicant but instead filed an Appeal No. 445 of 2021 in Hon’ble Appellate Tribunal praying for waiver of interest. 

 

# 15. Further the Applicant also in its IA No. 661 of 2020 had sought prayers for making fundamental changes in the Plan which had effect of modifying/altering the terms of the Resolution Plan and it was rightly rejected by this Tribunal vide Order dated 30.04.2021. 

 

# 16. The Respondent states that after the Resolution Plan was approved by the Adjudicating Authority and granted extension of time to the Applicant to make payment however, subject to pre-condition i.e. payment of interest. Further the Hon’ble NCLAT has not granted any stay on the aforesaid issue of interest and hence the Applicant until and unless makes payment in terms of the approved Resolution Plan, reliefs sought for handover by the Applicant is neither maintainable but the same is contrary to the approved Resolution Plan. Further the Adjudicating Authority has not been vested with power to review and modify its own Order. 

 

#17. Further, it is well settled law that once a Resolution Plan is approved by the Adjudicating Authority, it attains finality and cannot be altered or modified. 

 

# 18. Further, the Applicant is estopped in law as once the Resolution Plan is approved it includes the fee of the Monitoring Professional till complete payment is made. As per the approved Resolution Plan, the management and control of the business of the Corporate Debtor is as under :- 

• Management and control of the business of the Corporate Debtor. 

• “The Resolution Applicant note that post approval of the plan by Hon’ble NCLT, till the time the financial obligations proposed by him is not paid, the Resolution Applicant will be allowed to carry the operations and management of the Corporate Debtor under the supervision and control of a Monitoring Committee appointed by the CoC, which consists of existing RP, an independent person representing CoC and a representative of resolution application. Further though no cost will be leviable or borne by the Resolution Applicant in any manner for such supervision. The remuneration of the Resolution Professional in Monitoring Committee may continue at the current fee till the complete handover of CD to RA. Any act been performed by the Monitoring Committee will be done under the trust and for the benefit of the Resolution Applicant as well as Corporate Debtor.” 

 

# 19. The Applicant cannot seek modification of an approved Resolution Plan or can challenge the commercial wisdom of the CoC who have approved the Resolution Plan. The Applicant in its Plan has stated that the Monitoring Professional will be paid fee as of the Resolution Professional continuing in the Monitoring Committee till the complete handover of the Corporate Debtor to the Resolution Applicant which cannot be challenged by the Applicant who is not only estopped in law but also has no locus to challenge the commercial wisdom of the CoC who have approved the Resolution Plan. 

 

# 20. Also, the Respondent states that due to noncompliance of the Order dated 30.04.2021 by the Applicant, the Financial Creditors have decided not to handover of the possession until the Order dated 30.04.2021 is complied by the Applicant. 

 

# 21. Since the Appeal preferred by the Applicant is pending for adjudication in the Hon’ble Appellate Tribunal, the Financial Creditor suggested to keep amount equivalent to the interest in interest free no lien account of the lead Bank to which the Applicant dissented. Hence, the undertaking given by the Applicant demonstrates that the Applicant does not wish to comply with the directions of this Tribunal.

 

FINDINGS 

# 22. We have heard the Counsels appearing for the Applicant and the Respondent. We have also considered the above narrated facts and examined the merits of the present IA. 

 

# 23. At this juncture it is important to refer certain facts which needs to be considered. The Resolution Plan was approved by this bench vide Order dated 26.11.2019. Thereafter, the RP moved an application for removal of typographical errors which had occurred in para 18(g) of the Order. It was mentioned therein that the total amount due under the Resolution Plan shall be payable within 30 months instead of 3 months. The said error was rectified to this extent that payment of total amount due under the Plan to be payable within 3 months from the date of approval of the Resolution Plan. In view of the same IA No. 661 of 2020 was filed by the Resolution Applicant seeking prayer to extend the time line for making total payment of amount due under the Resolution Plan to be reckoned from 27.01.2020 instead of 26.11.2019. This Bench vide its Order dated 30.04.2021 partly allowed the time for making outstanding amount from 27.01.2020 subject to payment of interest at the rate of 12% p.a. The payment of interest was to be payable from the due date of remaining amount till the entire payment under the Plan was made. To this the Applicant preferred an Appeal which is pending for its Adjudication. The Respondent herein are reluctant to handover the complete control of the Corporate Debtor due to non-compliance of the interest by the Applicant. 

 

# 24. In view of the above facts we hereby are of the considered view that as the Applicant has paid entire amount in accordance with the terms of the Resolution Plan, the Respondent is hereby directed to handover complete control, Management as well as the operations of the Corporate Debtor Company to the Applicant i.e. the Successful Resolution Applicant subject to the Applicant to pay Interest @ of 12% p.a. from due date of remaining amount of payment of Resolution Plan until the entire amount paid under the Plan by the Applicant. Further it is observed in a Judgement passed by Hon’ble Supreme Court in “Gajendra Sharma V/s UOI” wherein the plight of the borrower/entrepreneur was duly considered in making payment of EMI during Covid-19 period and also observed that date of making payment of such due instalment can be deferred but there can be no waiver of interest accrued even during the pandemic situation. Hence the Applicant herein is liable to pay interest on amount due for such delayed/deferred payment in the light of the above decision. The Applicant is directed to deposit the said Interest amount in an Escrow account to be opened with the lead Bank. 

 

# 25. Further in light of the decision of the Hon’ble Supreme Court in the matter of “Ghanshyam Mishra and Sons Private Limited V/s Edelweiss Asset Reconstruction Company Limited” and also in “Jaypee Kensington Boulevard Apartments Welfare Association and Others V/s NBCC (India) Limited” and other landmark decisions of the Hon’ble Supreme Court, it is a settled law that all the liability of the Corporate Debtor which are prior to CIRP and prior to approval of the Resolution Plan and before transfer of the assets of the Corporate Debtor to the Resolution Applicant shall stand extinguished. The Successful Resolution Applicant is eligible to have encumbrance free transfer of the assets of the Corporate Debtor after the approval of the Resolution Plan. Therefore, the Applicant can approach the statutory authorities on the strength of the Hon’ble Supreme Court ruling and can get lifted the attachment and the prohibitory orders passed creating encumbrances on the assets of the Corporate Debtor to be removed. 

 

# 26. The Monitoring Professional is directed to extend necessary cooperation to the Applicant to approach the Government Authorities of Central and State Government for lifting the attachment/removal of prohibitory Orders encumbrance over the assets of the Corporate Debtor prior to CIRP and before the transfer of assets of the Corporate Debtor to the Resolution Applicant on approval of the Resolution Plan. 

 

# 27. Further, this Bench also observes that as the Plan has been approved and the Resolution Professional being one of the Member of the Monitoring Professional and as the work has substantially been reduced, the fee charged by the Respondent is excessive and exorbitant Hence, the fee of the Respondent/Monitoring Professional is fixed at Rs. 2,00,000/- per month. 

 

# 28. Further, as the Applicant has paid the entire amount under the Resolution Plan, the prayers in the Applications being IA 2666 of 2021 and IA 2847 of 2021 have now become infructuous. Hence, these Applications are disposed of. 

 

29. With the aforesaid observation, the present IA No. 2847 /2021 is partly allowed. 

 

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Amardeep Singh Bhatia Vs. Abhishek Nagori Liquidator for Asian Natural Resources (India) Ltd. - At the cost of repetition, having regard to the fact that Section 66 of the Code does not contemplate any lookback period; and also having regard to the fact that unless the Liquidator scrutinises the documents, he would not be able to finalise or conclude whether the transaction also falls under Sections 43 or 46 of the Code,

NCLAT (28.11.2019) in Amardeep Singh Bhatia Vs. Abhishek Nagori Liquidator for Asian Natural Resources (India) Ltd. (Company Appeal (AT) (Insolvency) NO. 671 of 2020 & I.A. No. 2116 of 2020) held that;

• At the cost of repetition, having regard to the fact that Section 66 of the Code does not contemplate any lookback period; and also having regard to the fact that unless the Liquidator scrutinises the documents, he would not be able to finalise or conclude whether the transaction also falls under Sections 43 or 46 of the Code,

Excerpts of the order;

# 1. Challenge in this Appeal is to the Impugned Order dated 29.05.2020, passed by the Learned Adjudicating Authority (National Company Law Tribunal, Indore Bench, Ahmedabad, Court – I), in I.A. – 458/2018 in CP (IB) 19 of 2017. By the Impugned Order, the Adjudicating Authority, while allowing the Application has observed as follows;

• “9. Observations

• 9.1. This Adjudicating Authority has observed that Insolvency commenced on 23.05.2017 and it is apprehended by the Liquidator and the Forensic Auditor and the allegations made by one of the Operational Creditors that certain transactions which can be termed as Undervalued Transactions, Preferential Transactions and Fraudulent Transaction had been carried out by the Members of the Suspended Management though two years prior to the Insolvency Commencement date.

• 9.2. The Members of the Suspended Management are not cooperating with the Liquidator on the plea that transactions are falling beyond the two years from the insolvency commencement date 1e. 23.05.2017.

• 9.3. This Adjudicating Authority has also observed that Liquidator has written to Mr. Khalid Baigh, Mr. Amardeep Singh Bhatia, Mr. Gaurav Agarwal, the Directors of Asian Natural Resources India Limited on 21.07.2018 informing them that in order to study and scrutinize the transactions of the Company, he feels it is necessary and requires necessary documents, details and the information available with them in respect of 9 transactions relating to Financial Years 2009-10 to 2013-14. The Liquidator vide the aforesaid letter also desired soft copy of (i) all ledgers with narrations (i) Bank Account Books with narrations (iii) Cash Book with narrations (iv) Sales Book with narrations and full details and (v) the Purchase Book with narrations and full details.

• 9.4. Mr. Khalid Baigh, the Director of Asian Natural Resources India Limited vide his reply dated 14.08.2018 has informed to the Liquidator that he has also received email from KPMG, the Forensic Auditor of Asian Natural Resources India Limited seeking all documents/papers etc from 01.04.2008 for completion of Forensic Audit. However, Mr. Khalid Baigh, has mentioned that they shall extend their full cooperation to arrange and provide information/data only for the period two years prior to the insolvency commencement date i.e., 23.05.2017 and requested the Liquidator to modify the mandate given to KPMG. to conduct the forensic audit from April 01, 2015.

• 9.5. It is also observed that KPMG, the Forensic Auditors appointed by the Liquidator has also asked for required data and information from the Suspended Management of Corporate Debtor from 01.04.2008.

• 9.6. It is observed in the application filed by the Operational Creditor, Vitol SA for execution of the Arbitral Award, the unequivocal findings of fact by the Ld. Division Bench of the Bombay High Court in Judgment dated 29th September 2016 in Appeal (L) No. 797 of 2015 and the Ld. Single Judge of the Bombay High Court vide judgment dated 54 October, 2015 in Chamber Summons (L) No. 444 of 2014 in that the promoters of erstwhile BIL now known as Asian Natural Resources India Limited, have wilfully engineered BIL sustaining losses of approx. Rs. 180 Crores by causing the coal trading undertaking to be fraudulently hived off from BIL to BGTL for an illusory consideration and were the direct beneficiaries of such a transaction.

• 9.7. Moreover, while a look-back period has been provided for undervalued transactions under section 46, there is no limitation period for fraudulent transactions covered under sections 49 and 66 of the Code. The intent is that “once a fraud, always a fraud”. The maxim “fraud vitiates every transaction into which it enters as well as to the contracts and other transactions”. The basic essence is that any person who has carried out any wilful act should not be allowed to get away by citing reasons such as lapse of time of look back period is 2 years only.

• 10. Judgement

• 10.1. Considering the documents, papers made available, arguments of both sides, involvement of high amount, Judgment of the Hon’ble High Court of Mumbai, the operations of the Corporate Debtor scattered in different countries, Corporate Debtor having number of associate companies and in the interest of justice to all stakeholders, exercising the inherent powers under Rule 11 of NCLT Rules, the Liquidator is hereby permitted to scrutinize /investigate the transactions executed/entered by the Corporate Debtor beyond 2 years from the insolvency commencement date i.e. from 01.04.2008 as required by the Forensic Auditor M/s. KPMG. The relevant information/documents/records are required to be sought by the Liquidator from the Directors/Suspended Board and other Personnel of the Corporate Debtor in relation to those transactions which have been entered into /executed by the Corporate Debtor from 01.04.2008.

• 10.2. Section 19 of the Code requires that the personnel of the Corporate Debtor, its promoters or any other persons associated with the management of the Corporate Debtor shall extend all assistance and cooperation to the interim resolution professional as may be required by him in managing the affairs of the Corporate Debtor.

• 10.3. The members of the Suspended Management of the Corporate Debtor are hereby directed to handover all the documents, information available with them and extend their full cooperation and assistance to the Liquidator as may be required by him in managing the affairs and completion of Liquidation Process of the Corporate Debtor in time. If the Suspended Management/Directors of the Corporate Debtor do not cooperate, handover the papers, documents etc. available with them, the Liquidator is at liberty to approach this Adjudicating Authority for issuing necessary consequential orders as it deems fit and proper.

• 10.4. The Forensic Auditors M/s. KPMG are also directed to complete the Forensic Audit within a period of 90 days and submit the report to the Liquidator so that the Liquidation Process is completed in time.

• 10.5. Since the other major company of the Suspended Management M/s. Bhatia Global International is now ordered to be liquidated as resolved by the CoC and the Liquidators of both the Companies Shri Abhishek Nagori for Asian Natural Resources (India) Limited and Shir Nitin Hasmukh Parikh Bhatia Global Trading Limited, are different, both the Liquidators are directed to coordinate with each other, if felt necessary and required, to complete the Liquidation Process in time.

• 10.6. More than 2 years have been passed since the initiation of Liquidation Process, the Liquidator is hereby advised to adhere to the time limit and submit the Progress Report to this Adjudicating Authority under Regulation 15 of the IBBI (Liquidation Process) Regulations, 2016 as stipulated for completion of Liquidation process and perform all his functions and duties contemplated inter alia in Section 35, 36, 37, 38, 39, 40, 41, 43, 45, 50, 53, 54 of Insolvency and Bankruptcy Code, 2016 and Rules of 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 23, 25, 30, 31, 32, 33, 34, 36, 37, 38, 39, 40, 41, 42, 44, 45 & 46 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 with utmost dedication, honesty and strictly in accordance with the provisions of the Code, Rules and Regulations.

• 10.5 The instant IA is disposed of accordingly with the above observations and instructions.”

 

# 2. The Learned Counsel for the Appellant/‘Mr. Amardeep Singh Bhatia’ submitted that Section 43 of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as ‘The Code’) deals with Preferential Transactions and specifies that the preference shall be deemed to be given, to a ‘Related Party’, during the period of two years, preceding the Insolvency Commencement Date (‘ICD’), or if the persons are other than a ‘Related Party’ then during the period of one year preceding the ICD. Learned Sr. Counsel submitted that Section 46 of the Code which deals with Avoidable Transactions refers to ‘Transactions’ made with any person within a period of one year preceding the ICD, or if a ‘Transaction’ is made with a ‘Related Party’, then within a period of two years preceding the ICD. It is contended that a bare reading of Sections 43 & 46 of the Code show that the ‘relevant time’ is either two years for a ‘Related Party’ or one year for any party other than a ‘Related Party’, prior to ICD. Learned Counsel, placed reliance on the Judgement of the Hon’ble Supreme Court in ‘Anuj Jain, IRP for Jaypee Infratech’ Vs. ‘Axis Bank Ltd.’1, in support of his argument, that transactions beyond two years cannot be investigated/scrutinised by the Liquidator.

 

# 3. It is vehemently contended by the Learned Sr. Counsel that even Fraudulent Transactions prior to 2 years of the ICD cannot be investigated by the Liquidator and therefore the Adjudicating Authority has erred in permitting the investigation of the ‘Transactions’ beyond two years. As the Liquidator cannot investigate a ‘Corporate Debtor’ beyond two years from the ICD, the personnel of the ‘Corporate Debtor’ under Section 19 of the Code cannot be expected to cooperate to provide documents for a period beyond this time. It is submitted that vide Order dated 01.07.2019, the Adjudicating Authority had earlier observed that as per the provisions of Section 43(4) of the Code, Forensic Audit beyond two years is not allowed.

 

# 4. It is also submitted that as per Section 35(1)(l) of the Code, the Liquidator can investigate the Financial Affairs of the ‘Corporate Debtor’ to determine ‘Undervalued’ or ‘Preferential Transactions’ which having a lookback period of two years prior to the ICD.

 

# 5. It is the case of the Respondent/Liquidator that Sections 43 of the Code indicate that the Liquidator or the Resolution Professional shall apply to the Adjudicating Authority, if in the opinion of the Liquidator or the Resolution Professional, the Corporate Debtor, has at the relevant time given a preference in such transactions; that the definition of ‘preference’ is given in Section 43(2) and the definition of ‘relevant time’ is in Section 43(4); that the Liquidator will have to scrutinize and peruse all the relevant materials to determine and arrive at an opinion as to whether ‘preference’ has been given by the Corporate Debtor at the ‘relevant time’; that the Corporate Debtor or the erstwhile promoters as in the present case cannot refuse material documents to the Liquidator at the threshold by citing Section 43(4) of the Code; that Section 45 of the Code states that if the Liquidator or the Resolution Professional, as the case may be, on an examination of the transactions of the corporate debtor referred to in subsection (2) of section 43 determines that certain transactions were made during the relevant period under Section 46, which were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction in accordance with this chapter; that the relevant period is defined in Section 46 of the Code; that even for the above examination, the Liquidator must have possession of all the material documents so that he can determine if there are undervalued transactions during the relevant period; that the corporate debtor cannot deny documents at the threshold itself; and that even if there are extortionate credit transactions, the Liquidator can approach the Adjudicating Authority as per Section 50. It is important to note that Section 50 presupposes that the Liquidator has possession of all material transactions dehors the two year look back period.

 

# 6. Section 66 of the Code deals with fraudulent or wrongful trading. It is the case of the Liquidator that there is no look back period of two years and Section  and if the Liquidator finds that there is a fraud committed by the ‘Corporate Debtor’ at any time, then he can approach the Adjudicating Authority by filing an Application and seeking directions under Section 66(2) of the Code. It is contended that even under Section 66; there is a presupposition that the Liquidator has possession of all the documents, hence, the Liquidator cannot be denied documents by the ‘Corporate Debtor’. Regulation 9 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, provides that the personnel shall extend cooperation to the Liquidator. There is no look back period referred to in Regulation 9. Section 35(1) of the Code also empowers the Liquidator to investigate the Financial Affairs of the ‘Corporate Debtor’ and does not specify any time period.

 

# 7. It is submitted that pursuant to the appointment of M/s. KPMG, Forensic Audit of the ‘Corporate Debtor’, certain documents were requested by KPMG from the Liquidator. As these documents were not in the possession of the Liquidator, but were in the possession of the suspended Directors, and other personnel of the ‘Corporate Debtor’, they were sought for from the ‘Corporate Debtor’. The Liquidator has also filed the details which they had sought for from the ‘Corporate Debtor’ but was not receiving any cooperation.

 

Assessment:

# 8. Section 43 of the Code which refers to ‘Preferential Transactions’ is reproduced as hereunder: . . . . . . 

 

# 9. For ready reference, Sections 45 & 46 which deals with ‘avoidance of Undervalued Transactions’ is also reproduced as hereunder: . . . . .

 

# 10. In the aforenoted Sections, though the relevant time is provided for under the Code, the fact remains that unless the Liquidator, scrutinises and peruses the material which is relevant, to determine whether the ‘Preferential Transactions’ or ‘Undervalued Transactions’ took place at the ‘relevant time’, he cannot come to a conclusion as to whether these transactions took place ‘during the relevant time’. We find force in the contention of the Liquidator that unless he is in the possession of all the material documents, he cannot determine whether they are ‘Undervalued Transactions’ or ‘Preferential Transactions’, during the relevant period of time, and therefore, the ‘Corporate Debtor’ cannot deny these documents at the threshold itself.

 

# 11. Now we address to ‘Fraudulent Trading’ or ‘Wrongful Trading’ as provided for under Section 66 of the Code. For ready reference, the said Section is being reproduced as hereunder:

 

# 12. There is no look back period specified under Section 66, which refers to ‘Fraudulent Transactions’. If the Liquidator finds that there is a fraud committed by the ‘Corporate Debtor’ at any time, he can approach the Adjudicating Authority and file an Application seeking necessary directions.

 

# 13. At this juncture, we place reliance on the Judgement of the Hon’ble Supreme Court in ‘State of Andhra Pradesh & Anr.’ Vs. ‘T. Suryachandra Rao’,2 wherein the Hon’ble Supreme Court while dealing with the concept of fraud, misrepresentation or false representation and suppression of material fact or document amount into fraud under the penal Code, Contract Act and ‘Companies Act, 1956’ has observed as follows:

• “14. Suppression of a material document would also amount to a fraud on the court. (See Gowrishankar v. Joshi Amba Shankar Family Trust (10996) 3 SCC 310 and S.P. Chengalvaraya Naidu v. Jagannath (1994) 1 SCC 1.

• 15. In Lazarus Estates Ltd. v. Bealsey (1956) 1 QB 702 : (1956) 1 All ER 341 : (1956) 2 WLR 502 (CA), Lord Denning observed at QB pp. 712 and 713: (All ER p. 345 C)

• “No judgement of a court, no order of a minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything.”

• In the same judgement Lord Parker, L.J. observed that fraud “vitiates all transactions known to the law of however high a degree of solemnity”.”

 

# 14. There is no provision in the Code for the Appellant to invoke the clause concerning relevant period of two years solely on the ground of denying documents/information directed to be given to the Liquidator. Regulation 9 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, read as follows:

• “9. Personnel to extend cooperation to liquidator.

(1) The liquidator may make an application to the Adjudicating Authority for a direction that a person who-

(a) is or has been an officer, auditor, employee, promoter or partner of the corporate debtor;

(b) was the interim resolution professional, resolution professional or the previous liquidator of the corporate debtor; or

(c) has possession of any of the properties of the corporate debtor; shall cooperate with him in the collection of information necessary for the conduct of the liquidation.

(2) An application may be made under this Regulation only after the liquidator has made reasonable efforts to obtain the information from such person and failed to obtain it.”

 

# 15. This Tribunal, is of the earnest view that the Adjudicating Authority has rightly invoked its Inherent Power under Rule 11 of the Company Law Rules, 2016 in the interest of justice to direct the Promoters to provide the relevant information.

 

# 16. Section 213 of the Companies Act 2013, reads as follows:

“213. The Tribunal may,—

(a) on an application made by—

(i) not less than one hundred members or members holding not less than one-tenth of the total voting power, in the case of a company having a share capital; or

(ii) not less than one-fifth of the persons on the company’s register of members, in the case of a company having no share capital, and supported by such evidence as may be necessary for the purpose of showing that the applicants have good reasons for seeking an order for conducting an investigation into the affairs of the company; or

(b) on an application made to it by any other person or otherwise, if it is satisfied that there are circumstances suggesting that—

(i) the business of the company is being conducted with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members or that the company was formed for any fraudulent or unlawful purpose;

(ii) persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii) the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company, order, after giving a reasonable opportunity of being heard to the parties concerned, that the affairs of the company ought to be investigated by an inspector or inspectors appointed by the Central Government and where such an order is passed, the Central Government shall appoint one or more competent persons as inspectors to investigate into the affairs of the company in respect of such matters and to report thereupon to it in such manner as the Central Government may direct:

Provided that if after investigation it is proved that—

(i) the business of the company is being conducted with intent to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose, or that the company was formed for any fraudulent or unlawful purpose; or

(ii) any person concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, then, every officer of the company who is in default and the person or persons concerned in the formation of the company or the management of its affairs shall be punishable for fraud in the manner as provided in section 447.”

 

# 17. There is no denial that the Liquidator had communicated regularly to the directors including the Appellant herein of various dates by email, and otherwise seeking information regarding the details concerning nine transactions relating to FY 2009-2019, which were necessary for the purpose of Forensic Audit being carried out by M/s. KPMG. Having regard to the provisions of the Code and the aforenoted Section 213 of the Companies Act, 2013, it can be said that NCLT has acted outside its jurisdiction by invoking Rule 11 of the NCLT Rules, 2016.

 

# 18. Section 213 of the Companies Act, 2013, empowers the Tribunal on an Application made to it by any other person or otherwise, and if it is specified that there are circumstances suggesting that the business of the Company was conducted with an intent to defraud its Creditors, the Tribunal can pass an Order after given a reasonable opportunity of being heard, that the affairs of the Company ought to be investigated by an Inspector or Inspectors appointed by the Central Government and where such an Order is passed, the Central Government shall appoint one or more competent person as Inspector to investigate into affairs of the Company……

 

# 19. The Judgement cited by the Learned Counsel for the Appellant in ‘Anuj Jain, IRP for Jaypee Infratech’ (Supra), is not relevant to the facts of the present case as in that case, the Adjudicating Authority has already passed an Order under Sections 43, 45 & 66 of the Code that certain transactions were ‘Preferential’/‘Undervalued’.

 

# 20. On an Application preferred by the Liquidator, seeking clarification as to whether the Liquidator was allowed to investigate the ‘Transactions’ executed or entered into by the ‘Corporate Debtor’, beyond two years from the ICD and relevant records can be asked for from the Promoters, the Adjudicating Authority has affirmed that the Promoters should give the necessary documents to the Liquidator and cooperate to enable the Forensic Auditors M/s. KPMG to complete the Audit. At the cost of repetition, having regard to the fact that Section 66 of the Code does not contemplate any lookback period; and also having regard to the fact that unless the Liquidator scrutinises the documents, he would not be able to finalise or conclude whether the transaction also falls under Sections 43 or 46 of the Code, we are of the considered view that there is no illegality or infirmity in the Order of the Adjudicating Authority having exercised its Inherent Powers under Rule 11 of NCLT Rules, 2016 and hence this Appeal fails and is accordingly dismissed. No Order as to costs.

 

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Imp. Rulings - Distribution of Plan Funds under Section 30.

Imp. Rulings - Distribution of Plan Funds under Section 30.

Index;

1. SCI (2024.01.03) in DBS Bank Ltd. Singapore Vs. Ruchi Soya Industries Ltd. and Anr. [Civil Appeal No. 9133 of 2019 with Civil Appeal No. 787 of 2020 ] [Value of Security Interest Section 30(2)]

2. NCLAT (13.07.2023) In Akashganga Processors Pvt. Ltd. Vs. Shri Ravindra Kumar Goyal & Ors. [Company Appeal (AT) (Insolvency) No.1148 of 2022] [Differential payment to different classes of Creditors]

3. SCI (03.05.2023) in  M.K. Rajagopalan Vs. Dr. Periasamy Palani Gounder & Anr.  [Civil Appeal Nos. 1682-1683, 1756, 1759, 1757, 1807, 1810 and 1827 of 2022] [Differential payment to Related Parties]

4. NCLT Hyderabad (13.03.2023) In Canara Bank Vs. Sri. Nitin Vishwanath Panchal RP [I.A. No.520 /2021 with I.A. No.663/2021 in CP(IB) No.384/7/HDB/2018] [Section 30(4) - Value of Security Interest]

5. NCLAT (22.12.2022) in Paramvir Singh Tiwana Vs. Puma Realtors Pvt. Ltd.. [Comp. App. (AT) (Ins.) Nos. 554, 564, 664/2021] [Payment to non claimant]

6. NCLAT (24.11.2022) in Greater Noida Industrial Development Authority Vs. Mr. Prabhjit Singh Soni & Anr. [Company Appeal (AT)(Insolvency) No.867 of 2021 & I.A. No. 2315 of 2021] [Sub-classes between Operational Creditors]

7. NCLAT (21.10.2022) in Jet Aircraft Maintenance Engineers Welfare Association Vs. Ashish Chhawchharia RP of Jet Airways (India) Ltd. & Ors.  [Company Appeal (AT) (Insolvency) Nos. 752, 643, 792, 801 915 of 2021, 361, 771 & 987 of 2022] [PF Dues - Compliance of Section 30(2)(e)]

8. NCLAT (20.07.2022) in Union Bank of India Vs. Mr. Rajender Kumar Jain, RP of M/S Kudos Chemie Ltd. & Ors.[Comp. App. (AT) (Ins.) No. 665 of 2022] [Sub- classes of Creditors] 

9. NCLAT (04.10.2021) In Gail India Ltd. Vs. Ajay Joshi (RP of Alok Industries Ltd. & Ors.) [Company Appeal (AT) (Ins.) 492 of 2019] [Sub-classes of Creditors & Collective Commercial Wisdom of CoC]

10. SCI (10.08.2021) in  Pratap Technocrats (P) Ltd. & Ors. vs. Monitoring Committee of Reliance Infratel Limited & Anr.. [Civil Appeal No 676 of 2021] [Equity based jurisdiction of NCLT]

11. SCI (13.05.2021) in India Resurgence ARC Private Limited  Vs Amit Metaliks Limited & Anr. [Civil Appeal No. 1700 of 2021] [Dissenting Financial Creditor]

12. NCLAT (18.11.2019) in DBS Bank Ltd., Singapore Vs. Mr. Shailendra Ajmera & [Anr.[Company Appeal (AT) (Insolvency) No. 788 of 2019] [Dissenting Financial Creditor]

13. SCI (15.11.2019) in CoC of Essar Steel India Limited vs. Satish Kumar Gupta & Ors. (Civil Appeal No. 8766-67 OF 2019) [ Sub-classes of Creditors]

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1). SCI (2024.01.03) in DBS Bank Ltd. Singapore Vs. Ruchi Soya Industries Ltd. and Anr. [Civil Appeal No. 9133 of 2019 with Civil Appeal No. 787 of 2020 ] held that;

• Section 30(2) refers only to the sum of money and nothing else, that is, it does not permit the dissenting financial creditor to enforce the security and sell the same. This would be counterproductive and may nullify the resolution plan. 

• What the dissenting financial creditor is entitled to is the payment, which should not be less than the amount/value of the security interest held by them. 

• The security interest gets converted from the asset to the value of the asset, which is to be paid in the form of money.

• A dissenting financial creditor is entitled to not partake the proceeds in the resolution plan, unless a higher amount in congruence with its security interest is approved in the resolution plan. The “amount” to be paid to the dissenting financial creditor should be in accordance with Section 53(1) in the event of liquidation of the corporate debtor.

• In other words, in our opinion, the dissenting financial creditor is entitled to a minimum value in monetary terms equivalent to the value of the security interest.

• The dissenting financial creditor has to statutorily forgo and relinquish his security interest on the resolution plan being accepted, and his position is same and no different from that of a secured creditor who has voluntarily relinquished security and is to be paid under Section 53(1)(b)(ii) of the Code.

• We wish to clarify that Section 53(1) is referred to in Section 30(2)(b)(ii) with the purpose and objective that the dissenting financial creditor is not denied the amount which is payable to it being equal to the amount of value of the security interest. The entire Section 53 is not made applicable.

• The dissenting financial creditor cannot object to the resolution plan, but can object to the distribution of the proceeds under the resolution plan, when the proceeds are less than what the dissenting financial creditor would be entitled to in terms of Section 53(1) if the corporate debtor had gone into liquidation. This is the statutory option or choice given by law to the dissenting financial creditor. The option/choice should be respected.

• In view of the aforesaid discussion, and as we are taking a different view and ratio from India Resurgence ARC Private Limited (supra) on interpretation of Section 30(2)(b)(ii) of the IBC, we feel that it would be appropriate and proper if the question framed at the beginning of this judgment is referred to a larger Bench.

[ Link Synopsis ]

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2). NCLAT (13.07.2023) In Akashganga Processors Pvt. Ltd. Vs. Shri Ravindra Kumar Goyal & Ors. [Company Appeal (AT) (Insolvency) No.1148 of 2022] held that;

• Fair and equitable dealing of operational creditors’ rights under the said Regulation involves the resolution plan stating as to how it has dealt with the interests of operational creditors, which is not the same thing as saying that they must be paid the same amount of their debt proportionately. 

• Also, the fact that the operational creditors are given priority in payment over all financial creditors does not lead to the conclusion that such payment must necessarily be the same recovery percentage as financial creditors. 

• So long as the provisions of the Code and the Regulations have been met, it is the commercial wisdom of the requisite majority of the Committee of Creditors which is to negotiate and accept a resolution plan, which may involve differential payment to different classes of creditors.

[ Link Synopsis ]

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3). SCI (03.05.2023) in  M.K. Rajagopalan Vs. Dr. Periasamy Palani Gounder & Anr.  [Civil Appeal Nos. 1682-1683, 1756, 1759, 1757, 1807, 1810 and 1827 of 2022] held that;

• It has rightly been argued on behalf of the appellants and had rightly been observed by the Adjudicating Authority (vide extraction in paragraph 15.4.1 hereinabove) that there was no provision in the Code which mandates that the related party should be paid in parity with the unrelated party. 

• So long as the provisions of Code and CIRP Regulations are met, any proposition of differential payment to different class of creditors in the resolution plan is, ultimately, subject to the commercial wisdom of CoC and no fault can be attached to the resolution plan merely for not making the provisions for related party.

[ Link Synopsis ]

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4). NCLT Hyderabad (13.03.2023) In Canara Bank Vs. Sri. Nitin Vishwanath Panchal RP [I.A. No.520 /2021 with I.A. No.663/2021 in CP(IB) No.384/7/HDB/2018] held that;

• The word used being “may”,[in section 30(4)] the same is directory and not mandatory. That apart, the said provisions is only an enabling provision and does not impose any mandate on the COC to distribute payments to creditors based on the value of security held by them.

• What amount is to be paid to different cases or subclasses of creditors in accordance with the provisions of the IB Code, 2016 and the related Regulations, is essentially the commercial wisdom of the Committee of Creditors, and a dissenting secured creditor like the Appellant therein cannot suggest a higher amount to be paid to it with reference to the value of the Security Interest.

[ Link Synopsis ]

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5). NCLAT (22.12.2022) in Paramvir Singh Tiwana Vs. Puma Realtors Pvt. Ltd.. [Comp. App. (AT) (Ins.) Nos. 554, 564, 664/2021] held that;

• Fair and equitable dealing of operational creditors’ rights under the said regulation involves the resolution plan stating as to how it has dealt with the interests of operational creditors, which is not the same thing as saying that they must be paid the same amount of their debt proportionately.

• It is clear that so long as the provisions of the Code and the regulations have been met, it is the Commercial Wisdom of the requisite majority of the CoC which is to negotiate and accept the Resolution Plan, which may involve differential payments to different classes of Creditor, together with negotiating with a Prospective Resolution Applicant for better or different terms which may also involve differences in amounts of distribution between the different classes of Creditors. 

• In the instant case, what has to be kept in mind is that the ‘Corporate Debtor’ is a Real Estate Company involved in construction of Housing and Commercial Units and the land on which the construction is to be completed belongs to GMADA. As the nature of the activity of the ‘Corporate Debtor’ is dependent on the land owned by GMADA, the commercial decision taken by the CoC to make a provision in the Resolution Plan with respect to the Statutory Dues owed to GMADA, cannot be faulted with, though GMADA has failed to make the requisite claim, as provided for under the Code, but has been in communication with the RP. 

• “Though we do not appreciate the act of GMADA not having filed their claim, the fact remains that the ‘Real Estate Project’ is being constructed on GMADA land and all approvals, permits and licences involves GMADA, which is a ‘Secured Creditor’.

• “Further, the nature of business and the ground realities were kept in mind by the CoC before taking a commercial decision. In approval of the Resolution Plan, the CoC takes a business decision ‘based on ground realities, by a majority which binds all stakeholders including dissenting Creditors’.

[ Link Synopsis ]

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6). NCLAT (24.11.2022) in Greater Noida Industrial Development Authority Vs. Mr. Prabhjit Singh Soni & Anr. [Company Appeal (AT)(Insolvency) No.867 of 2021 & I.A. No. 2315 of 2021] held that;

• “The definition of ‘Financial Debt’ in section 5(8) of IB Code then goes on to state that a debt must be disbursed against the consideration for the time value of money….”

• There is no embargo on creating subclasses between the ‘Operational Creditors’ for deciding the manner in which the ‘Resolution Amount’ is to be distributed.

[ Link Synopsis ]

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7). NCLAT (21.10.2022) in Jet Aircraft Maintenance Engineers Welfare Association Vs. Ashish Chhawchharia RP of Jet Airways (India) Ltd. & Ors.  [Company Appeal (AT) (Insolvency) Nos. 752, 643, 792, 801 915 of 2021, 361, 771 & 987 of 2022] held that;

• The workmen are entitled to full payment of provident fund and gratuity, hence, the balance of above dues are to be paid by the Successful Resolution Applicant, to satisfy statutory obligations. Non-payment of full provident fund and gratuity shall lead to violation of Section 30(2)(e), hence, to save the plan the above payments have to be made.

• We, thus, do not find any substance in the submission of the learned Counsel that payment to the Secured Financial Creditors under Section 53(1)(b) has to be made as per their value of the security interest and the Resolution Plan did not take into consideration their debt, which is the debt of the Financial Creditors while allocating the amount.

• We have already held that the employees were also entitled to receive their full amount of provident fund to which they were entitled under 1952 Act and gratuity due till commencement of insolvency under the Payment of Gratuity Act, 1972, which they were entitled as per Section 30(2)(e) of the Code.

• We hold that provident fund dues were entitled to be paid in full. In view of the judgment of Supreme Court in “Maharashtra State Cooperative Bank Limited vs. Assistant Provident Fund Commissioner & Others” (Supra), the claim of Appellant was to be satisfied in full, otherwise breach of provision of Section 30(2)(e) would have occurred. We, thus, are inclined to issue direction to the Successful Resolution Applicant to make payment of the admitted claim of the Appellant towards provident fund dues to save the plan from invalidity.

[ Link Synopsis ]

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8). NCLAT (20.07.2022) in Union Bank of India Vs. Mr. Rajender Kumar Jain, RP of M/S Kudos Chemie Ltd. & Ors.[Comp. App. (AT) (Ins.) No. 665 of 2022] held that;

• “ Thus, what amount is to be paid to different classes or sub-classes of creditors in accordance with provisions of the Code and the related Regulations, is essentially the commercial wisdom of the Committee of Creditors and a dissenting secured creditor like the appellant cannot suggest a higher amount to be paid to it with reference to the value of the security interest.”

[ Link Synopsis ]

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9). NCLAT (04.10.2021) In Gail India Ltd. Vs. Ajay Joshi (RP of Alok Industries Ltd. & Ors.) [Company Appeal (AT) (Ins.) 492 of 2019] held that;

• this Tribunal, is of the considered opinion that the ‘Operational Creditors’ were paid as per Section 30(2) (b) of the I&B Code, 2016, and coupled with Regulation 38 of the ‘CIRP Regulations’ the ‘Operational Creditors’ are entitled to receive only such money that are payable to them as per Section 53 of Code.

• In reality, there is no embargo for the classification of Operational creditor(s) into separate/different classes for deciding the way in which the money is to be distributed to them by the ‘Committee of Creditors’ because of the fact, undoubtedly, they do have the subjective final discretion of ‘Collective Commercial Wisdom’ in relation to 

• (1) The amount to be paid 

• (2) The quantum of money to be paid, to a certain category or the incidental category of creditors, of course, nicely balancing the interests of the ‘Stakeholders’ and the ‘Operational Creditors’, as the case may be. 

[ Link Synopsis ]

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10).. SCI (10.08.2021) in  Pratap Technocrats (P) Ltd. & Ors. vs. Monitoring Committee of Reliance Infratel Limited & Anr.. [Civil Appeal No 676 of 2021] held that;

• # 22. . . .The jurisdiction of the Adjudicating Authority under Section 31(1) is to determine whether the resolution plan, as approved by the CoC, complies with the requirements of Section 30(2). The NCLT is within its jurisdiction in approving a resolution plan which accords with the IBC. There is no equity-based jurisdiction with the NCLT, under the provisions of the IBC.

• # 29.  . . . . Fair and equitable treatment, in other words, is what is fair and equitable between the operational creditors as a class, and not between different classes of creditors. The statute has indicated that once the requirements of Section 30(2)(b) are fulfilled, the distribution in accordance with its provisions is to be treated as fair and equitable to the operational creditors.

• # 39. . .  . .The jurisdiction of the Adjudicating Authority and the Appellate Authority cannot extend into entering upon merits of a business decision made by a requisite majority of the CoC in its commercial wisdom. Nor is there a residual equity based jurisdiction in the Adjudicating Authority or the Appellate Authority to interfere in this decision, so long as it is otherwise in conformity with the provisions of the IBC and the Regulations under the enactment. 

[ Link Synopsis ]

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11).  SCI (13.05.2021) in India Resurgence ARC Private Limited  Vs Amit Metaliks Limited & Anr. [Civil Appeal No. 1700 of 2021] held that;

• # 11. . . .Once it is found that all the mandatory requirements have been duly complied with and taken care of, the process of judicial review cannot be stretched to carry out quantitative analysis qua a particular creditor or any stakeholder, who may carry his own dissatisfaction.

• # 13.1. Thus, what amount is to be paid to different classes or subclasses of creditors in accordance with provisions of the Code and the related Regulations, is essentially the commercial wisdom of the Committee of Creditors; and a dissenting secured creditor like the appellant cannot suggest a higher amount to be paid to it with reference to the value of the security interest.

• 14.1. That a dissenting financial creditor would be receiving the payment of the amount as per his entitlement; and that entitlement could also be satisfied by allowing him to enforce the security interest, to the extent of the value receivable by him.

• It has never been laid down that if a dissenting financial creditor is having a security available with him, he would be entitled to enforce the entire of security interest or to receive the entire value of the security available with him.

• It is but obvious that his dealing with the security interest, if occasion so arise, would be conditioned by the extent of value receivable by him.

• # 15. It has not been the intent of the legislature that a security interest available to a dissenting financial creditor over the assets of the corporate debtor gives him some right over and above other financial creditors so as to enforce the entire of the security interest and thereby bring about an inequitable scenario, by receiving excess amount, beyond the receivable liquidation value proposed for the same class of creditors.

• # 16. .  . . .We may profitably refer to the relevant observations in this regard by this Court in Essar Steel as follows:- “85. Indeed, if an "equality for all" approach recognising the rights of different classes of creditors as part of an insolvency resolution process is adopted, secured financial creditors will, in many cases, be incentivised to vote for liquidation rather than resolution, as they would have better rights if the corporate debtor was to be liquidated rather than a resolution plan being approved. This would defeat the entire objective of the Code which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.”

[ Link Synopsis ]

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12). NCLAT (18.11.2019) in DBS Bank Ltd., Singapore Vs. Mr. Shailendra Ajmera & Anr.[Company Appeal (AT) (Insolvency) No. 788 of 2019] held that;

• # 9. . .  . . . . .As per amended Section 30(2)(b)(ii), the distribution is to be made in the manner as prescribed under Section 53(1) giving preference to the secured creditor. However, even at that stage no discrimination can be made between two similarly situated ‘secured creditor’.

• # 10. . . . . . .Section 30(2)(b)(ii) cannot be interpreted in a manner to give advantage to a ‘dissenting secured financial creditor’. In fact Section 30(2)(b)(ii) has been amended only to ensure that ‘dissenting financial creditor’ should not get anything ‘less than liquidation value’ but not for ‘getting maximum of the secured assets’.

[ Link Synopsis ]

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13). SCI (15.11.2019) in CoC of Essar Steel India Limited vs. Satish Kumar Gupta & Ors. (Civil Appeal No. 8766-67 OF 2019) besides ruling on various aspects held that;

• "# 40. The importance of the majority decision of the Committee of Creditors is then stated in Section 31(1) of the Code which is set out as follows:

• “31. Approval of resolution plan

• (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.”

• Thus, what is left to the majority decision of the Committee of Creditors is the “feasibility and viability” of a resolution plan, which obviously takes into account all aspects of the plan, including the manner of distribution of funds among the various classes of creditors. As an example, take the case of a resolution plan which does not provide for payment of electricity dues. It is certainly open to the Committee of Creditors to suggest a modification to the prospective resolution applicant to the effect that such dues ought to be paid in full, so that the carrying on of the business of the corporate debtor does not become impossible for want of a most basic and essential element for the carrying on of such business, namely, electricity. This may, in turn, be accepted by the resolution applicant with a consequent modification as to distribution of funds, payment being provided to a certain type of operational creditor, namely, the electricity distribution company, out of upfront payment offered by the proposed resolution applicant which may also result in a consequent reduction of amounts payable to other financial and operational creditors. What is important is that it is the commercial wisdom of this 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.

• # 56. By reading paragraph 77 de hors the earlier paragraphs, the Appellate Tribunal has fallen into grave error. Paragraph 76 clearly refers to the UNCITRAL Legislative Guide which makes it clear beyond any doubt that equitable treatment is only of similarly situated creditors. This being so, the observation in paragraph 77 cannot be read to mean that financial and operational creditors must be paid the same amounts in any resolution plan before it can pass muster. On the contrary, paragraph 77 itself makes it clear that there is a difference in payment of the debts of financial and operational creditors, operational creditors having to receive a minimum payment, being not less than liquidation value, which does not apply to financial creditors. The amended Regulation 38 set out in paragraph 77 again does not lead to the conclusion that financial and operational creditors, or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the resolution plan before it can pass muster. Fair and equitable dealing of operational creditors’ rights under the said Regulation involves the resolution plan stating as to how it has dealt with the interests of operational creditors, which is not the same thing as saying that they must be paid the same amount of their debt proportionately. Also, the fact that the operational creditors are given priority in payment over all financial creditors does not lead to the conclusion that such payment must necessarily be the same recovery percentage as financial creditors. So long as the provisions of the Code and the Regulations have been met, it is the commercial wisdom of the requisite majority of the Committee of Creditors which is to negotiate and accept a resolution plan, which may involve differential payment to different classes of creditors, together with negotiating with a prospective resolution applicant for better or different terms which may also involve differences in distribution of amounts between different classes of creditors.

• # 80. When it comes to the validity of the substitution of Section 30(2) (b) by Section 6 of the Amending Act of 2019, it is clear that the substituted Section 30(2)(b) gives operational creditors something more than was given earlier as it is the higher of the figures mentioned in sub-clauses (i) and (ii) of sub-clause (b) that is now to be paid as a minimum amount to operational creditors. The same goes for the latter part of sub-clause (b) which refers to dissentient financial creditors. Mrs. Madhavi Divan is correct in her argument that Section 30(2)(b) is in fact a beneficial provision in favour of operational creditors and dissentient financial creditors as they are now to be paid a certain minimum amount, the minimum in the case of operational creditors being the higher of the two figures calculated under sub-clauses (i) and (ii) of clause (b), and the minimum in the case of dissentient financial creditor being a minimum amount that was not earlier payable. As a matter of fact, pre-amendment, secured financial creditors may cram down unsecured financial creditors who are dissentient, the majority vote of 66% voting to give them nothing or next to nothing for their dues. In the earlier regime it may have been possible to have done this but after the amendment such financial creditors are now to be paid the minimum amount mentioned in sub-section (2). Mrs. Madhavi Divan is also correct in stating that the order of priority of payment of creditors mentioned in Section 53 is not engrafted in sub-section (2)(b) as amended. Section 53 is only referred to in order that a certain minimum figure be paid to different classes of operational and financial creditors. It is only for this purpose that Section 53(1) is to be looked at as it is clear that it is the commercial wisdom of the Committee of Creditors that is free to determine what amounts be paid to different classes and sub-classes of creditors in accordance with the provisions of the Code and the Regulations made thereunder."

[ Link Synopsis ]

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Provisions of the Code;

# Section 30. Submission of resolution plan. -

(1) A resolution applicant may submit a resolution plan along with an affidavit stating that he is eligible under section 29A to the resolution professional prepared on the basis of the information memorandum.

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

• (a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the 3[payment] of other debts of the corporate debtor;

• (b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than

• (i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or

(ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53, whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.

Explanation 1. — For removal of doubts, it is hereby clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.

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(3) The resolution professional shall present to the committee of creditors for its approval such resolution plans which confirm the conditions referred to in sub-section (2).

(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board:

Provided that the committee of creditors shall not approve a resolution plan, submitted before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (Ord. 7 of 2017), where the resolution applicant is ineligible under section 29A and may require the resolution professional to invite a fresh resolution plan where no other resolution plan is available with it:

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CIRP Regulations

# Regulation 37. Resolution plan.

A resolution plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets, including but not limited to the following: -

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# Regulation 38. Mandatory contents of the resolution plan.

(1) The amount payable under a resolution plan -

(a) to the operational creditors shall be paid in priority over financial creditors; and

(b) to the financial creditors, who have a right to vote under sub-section (2) of section 21 and did not vote in favour of the resolution plan, shall be paid in priority over financial creditors who voted in favour of the plan.

 (1A). A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.]

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From the above it can be observed that;

1. Section 30(2) provides for minimum payment to be made to the operational creditor and dissenting financial creditor, i.e. which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.

2. Subject to the provisions of section 30(2), complete flexibility has been provided to the resolution applicant to propose distribution of funds, in a differential manner, amongst different creditors of the CD, keeping in view the viability and future exigencies of the business. The complete flexibility of resolution applicant, subject to section 30(2), in distribution of funds has been recognised by Hon’ble Supreme Court in CoC of Essar Steel India Limited vs. Satish Kumar Gupta & Ors. (Civil Appeal No. 8766-67 OF 2019.

3. Concept of differential payments in a class of creditors is inherent in the Code, as evident from the provisions of section 53.

• Operational Creditors;

Workmen Dues	Priority under section 53(1)(b)
Employees Dues	Priority under section 53(1)(c)
Govt. Dues	Priority under section 53(1)(e)
Suppliers of Goods & Services	Priority under section 53(1)(f)

4. As per section 30(4) CoC may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board.

Here it is quite important to note that under sub section 4 of section 30, the word may has been used, whereas in the  proviso to sub section 4 of section 30, the word shall has been used. This clearly emphasises that the provisions of section 53(1)  are directory during CIRP process and are not mandatory.;

• Section 30(4)  . . . . . . the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board:

Provisions of Section 53 are mandatory during Liquidation process & are only directory during the Corporate Insolvency Resolution Process, and non compliance of the provisions of section 53 during CIRP cannot be construed as contravention of any of the provisions of the law for the time being in force (section 30(2)(e).

5. Regulation 38(1) provides that operational creditors & dissenting financial creditors, as per the provisions of section 30(2), shall be paid their share of the resolution plan, in priority over financial creditors who voted in favour of the plan. It nowhere specifies the quantum of share of operational creditors & dissenting financial creditors in the resolution plan is required to be paid.

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