M.K. Rajagopalan Vs. Dr. Periasamy Palani Gounder & Anr. - 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.

 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.

• when we find that the settlement proposal of the promoter, after approval of CoC, for invoking the provisions of Section 12-A of the Code, is pending before the Adjudicating Authority, in our view, it shall be in the fitness of things that all the relevant aspects of the matter are left open for consideration of the Adjudicating Authority, including those relating to the justification for invoking Section 12-A after issuance of fresh invitation for EOI and after receiving resolution plans

Excerpts of the order;

Point C2 – Effect of Section 88 Trusts Act

44. What has been stated hereinabove in relation to the question of ineligibility of the resolution applicant in terms of Section 164(2)(b) of the Companies Act, however, does not apply in relation to the other material objection as regards Section 88 of the Trusts Act.

44.1. It is not in dispute that the trust “Sri Balaji Vidyapeeth” of which the appellant-resolution applicant is the Managing Trustee, was one of the disqualified resolution applicants on the ground that the said entity was a charitable trust. It has been argued on behalf of the appellant that his status as Managing Trustee of the said trust does not render him ineligible while submitting the resolution plan in his individual capacity. It has also been argued that even if the trust may be disqualified, the appellant cannot be disqualified because his financial capability was independent of the trust money. In our view, this part of the matter cannot be examined by a broad and generalised reference to the separate status of the two entities, i.e., the trust on one hand and the resolution applicant as an individual on the other.

44.2. Noticeable it is that the said trust was held ineligible on the ground that it was a charitable trust and cannot run a profit-making entity. The EOIs in the first place were submitted by the present appellant-resolution applicant for himself as also on behalf of the trust. The Appellate Tribunal has rightly noticed that this filing of two EOIs by the resolution applicant, one for himself and another one on behalf of the ineligible trust has a material bearing on the competence of the resolution plan of the appellant, for being directly hit by Section 88 of the Trusts Act. The Appellate Tribunal has rightly held that the applicant-Mr. M.K. Rajagopalan, being the Managing Trustee of the said trust, cannot be permitted to act as its alter ego in implementing the resolution plan to gain financial advantage for himself. By virtue of the operation and impact of Section 88 of the Trusts Act, submission of individual resolution plan by the appellant cannot be countenanced for any implementation of the said individual resolution plan would nevertheless be hit by the provisions contained in the Trusts Act. We may elaborate a little.

44.3. The suggestion on the part of the resolution applicant to assert his independent standing detached from the said ineligible applicant Sri Balaji Vidyapeeth carries its own shortcoming when examined in the context of the assertions made by him in clauses 3.5 and 3.10 of his resolution plan which have been extracted by the Appellate Tribunal and we are impelled to re-extract them for ready reference as under:

• “3.5. Sri Balaji Vidyapeeth: Mr. M.K. Rajagopalan is the founder and managing trustee of Sri Balaji Vidyapeeth………

• 3.10. Financial Snapshot “The entities under the leadership of Mr. M.K. Rajagopalan have been growing rapidly while ensuring quality of service to nation and public at large……..

There entities have achieved turnover of Rs. 417.94 Crores in FY 2016- 2017; Rs. 500.03 Crores in FY 2017-2018; Rs. 679.23 Crores in FY 2018-2019 and Rs.860.59 Crores (estimated) for FY 2019-2020. The above growth is ample testimony of the credentials of the RA as a competent business leader and his capability to manage and turn around various diverse businesses.”

44.3.1. It is thus obvious that the appellant-resolution applicant admitted his status as founder and managing trustee of said Sri Balaji Vidyapeeth and then, boldly claimed that the entities under his leadership were growing rapidly while ensuring quality of service to nation and public at large. In view of the claim made by the resolution applicant himself, coupled with the fact that in CIRP in question, two resolution plans were submitted by this appellant, one in individual capacity and another as managing director of the said trust, it is difficult to detach him from the said resolution applicant-Sri Balaji Vidyapeeth. Hence, it cannot be said that the Appellate Tribunal committed any error in observing that the appellant was attempting to act as alter ego of the said ineligible applicant (the trust); and the benefit from his own (individual’s) resolution plan cannot escape the operation of Section 88 of the Trusts Act. Even if the appellant would assert that his financial capability was independent of trust money, the fact of the matter remains that he projected the overall picture of his own profile while also relying on his status as Managing Trustee of the said trust, Sri Balaji Vidyapeeth. Thus, any pecuniary advantage gained by him under the resolution plan in question would be directly subsumed by operation of Section 88 of the Trusts Act. This would, in all practical purposes, bring about a position that what could not be done directly for the said trust was sought to be done by the appellant by way of this indirect methodology.

44.4. Although, the aspects aforesaid did not form the part of consideration of CoC but, they cannot be ignored merely with reference to the status assigned to the commercial wisdom of CoC. The principles underlying the decisions of this Court respecting the commercial wisdom of CoC cannot be over-expanded to brush aside a significant shortcoming in the decision making of CoC when it had not duly taken note of the operation of any provision of law for the time being in force.

44.5. In the given set of facts and circumstances of this case, in our view, the Appellate Tribunal has rightly held the resolution plan being in contravention of the provisions of law for the time being in force. Observations and findings of the Appellate Tribunal in paragraphs 106 to 112 of the impugned order dated 17.02.2022 (reproduced hereinabove in paragraph 19.4.2.) deserve to be and are approved.

Point E – The matter concerning related party

# 52. Another factor taken into consideration by the Appellate Tribunal has been in relation to the so-called discrimination in the resolution plan in relation to a related party of the corporate debtor.

# 53. Learned counsel for the appellant in Civil Appeal No.1827 of 2022 has referred to several decided cases to submit that therein, even when certain dues of related parties were admitted, the resolution plans not providing for any payment to such related parties were upheld by this Court; and that the principles of non-discrimination would not be applicable to the decision of CoC. It has been argued on behalf of the resolution professional that none of the statutory requirements are of any mandate that a provision has to be made in the resolution plan for payment to the related parties. According to the learned counsel, the need is, essentially, to ensure that the plan provides for payment to financial creditors (including dissenting financial creditors) entitled to vote. Thus, the plan in question cannot be said to be standing in contravention of any mandatory requirements. Per contra, the learned counsel appearing for the related party would submit that even when related party is to be treated as a separate class in terms of the principles laid down by this Court in Phoenix ARC (supra), so as to be excluded from CoC, there is no reason that they be treated as separate class when it comes to payment of dues under the resolution plan. It is submitted that failure to provide for discharge of debt of the related party is in violation of Section 30(2)(b), (e) and (f) of the Code. The submissions made on behalf of the related party and the observations of the Appellate Tribunal are difficult to be accepted.

# 54. The lengthy discussion of Appellate Tribunal in regard to the related party (the parts whereof have been reproduced in paragraph 19.7 hereinabove) depict rather unsure and irreconcilable observations of the Appellate Tribunal.

# 54.1. After taking note of the fact that related party is prohibited to be a part of CoC and is further prohibited to be a resolution applicant or an authorized representative etc., the Appellate Tribunal has rightly observed that involvement of a related party in CIRP in any capacity was seen as giving unfair benefit to the corporate debtor; and that the statutory recognition of related party as a different class would apply even to resolution plan when CoC would decide whether in its commercial wisdom it should pay to related party at all because that would mean paying to the same persons who are behind the corporate debtor. However, thereafter the Appellate Tribunal proceeded to observe that related party was required to be equated with the promoters as equity share-holders and then, further made certain observations about discrimination between related party unsecured financial creditor and other unsecured financial creditors as also between related party operational creditor and other operational creditors. Such far-stretched observations of the Appellate Tribunal are difficult to be reconciled with the operation of the statutory provisions.

# 54.2. 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.

# 54.3. On the facts of the present case, we find no reason to discuss this matter any further when it is noticed that the promoter and erstwhile director, the contesting respondent before us, has been holding the position of Chairman of the said related party. Suffice it would be to observe for the present purpose that the Appellate Tribunal has erred in applying the principles of non-discrimination and thereby holding against the resolution plan in question for want of provision for related party.

Point F – NCLAT’s findings regarding settlement offer of promoter

# 55. The discussion foregoing, particularly with answers to points C2, C3 and D1 is decisive of the matter so far as approval of the resolution plan in question is concerned. As noticed, for want of eligibility of the resolution applicant and for want for approval of the finally revised resolution plan by CoC meeting, the resolution plan in question is required to be rejected and the process as adopted in seeking approval of the Adjudicating Authority is required to be disapproved. However, the other segment of consideration in this case, carrying the peculiarities of its own, relates to the settlement offer of the promoter and operation of the provisions of Section 12-A of the Code.

# 56. A comprehensive look at the factual aspects and the orders previously passed in the matter make it clear that right from the inception of CIRP in question, the promoter and erstwhile director had made several attempts to invoke the operation of Section 12-A of the Code. At the very initial stage, while admitted the petition made by TFCI, the NCLT observed in its order dated 05.05.2020 that the attempts on the part of corporate debtor by way OTS settlement proposal had only been to gain time. Yet again, when the process has gone several steps ahead and when the resolution plans were being put to vote, just a day before voting, the promoter put forth yet another settlement proposal without any concrete plan and without disclosing the source of funds to complete the settlement. The CoC, after due deliberation, refused to consider the same and thereafter voted on the resolution plan in question.

# 57. The Adjudicating Authority (NCLT) dealt with the matter in sufficient detail (vide paragraph 15.2 and relevant extraction therein) while noting that even the original applicant of CIRP, i.e., TFIC, was kept in dark about such a proposal. It was also noticed that even the term-sheet to support the proposal from Deutsche Bank came with a disclaimer. In the totality of facts and circumstances, the proposals as made by the promoter and erstwhile director were all of eyewash and of dilatory tactics. However, the Appellate Tribunal (NCLAT) proceeded to observe that in the ninth CoC meeting, no discussion about settlement proposal had occurred and that CoC never considered the settlement proposal submitted by the promoter and erstwhile director; and that after getting the settlement proposal, it was incumbent upon the resolution professional to call the CoC meeting for consideration of such proposal. The observations of the Appellate Tribunal cannot be said to be in conformity with the record of proceedings.

# 57.1. As noticed, the proposal in question was forwarded for consideration only at the eleventh hour, i.e., a day before CoC was to vote on the resolution plan in its ninth meeting. The CoC, in the said meeting, indeed, took into consideration the proposition of settlement and application for withdrawal request letter, which was circulated two hours before the meeting. The creditors with significant voting shares such as SBI and Bank of India were clear in their stand that they would stick to the agenda and would not deviate therefrom. The resolution professional had to request the representatives of the corporate debtor to allow the agenda items to go through as per the wishes of the majority of CoC and no further discussions were to be made on the letter sent to CoC. When the substantial majority of CoC was not in favour of such discussion which was proposed to be thrusted on them only a few hours before the meeting, their approach cannot be faulted at. In any case, an application for withdrawal in terms of Section 12-A of the Code could have been made only if CoC approved the proposal with 90% voting share. When the creditors with substantial voting share were against any such proposal, any consideration was clearly ruled out and there could not have been any valid application for withdrawal.

# 58. Thus, the Appellate Tribunal has erred in holding that the settlement offer of the promoter in terms of Section 12-A was not placed for consideration of CoC. Approval of resolution plan in question could not have been reversed on this count. However, as noticed hereinbefore, approval of the resolution plan in question could not have been endorsed by the Appellate Tribunal because of other substantial reasons.

Point G – Impact and effect of subsequent events

# 59. The discussion aforesaid would have been decisive of the matter but there had been several subsequent events in this matter, particularly of fresh invitation for EOI and then, approval of the settlement offer of the promoter by the CoC in its nineteenth meeting held on 12.10.2022 by 100% majority of the voting share. Thus, the question is about the impact and effect of such subsequent events. For dealing with this question, we need to recapitulate the relevant background aspects of the case and the chronology of subsequent events.

# 60. As noticed, in the impugned judgment and order dated 17.02.2022, the Appellate Tribunal had directed the CoC to reconsider the offer of the promoter within fifteen days from the date of its order (i.e., within fifteen days from 17.02.2022). Prior to this, twice over the propositions of such settlement offer by the promoter had been dealt with disfavourably. The relevant parts of proceedings in the ninth CoC meeting concerning such proposal have already been noticed hereinbefore. It is noticed that after approval of the resolution plan, the promoter again submitted a settlement proposal on 08.03.2021 which was followed by a letter dated 14.07.2021 from one Saveetha Institute of Medical and Technical Sciences as proof of funding, but the said letter was subsequently withdrawn by the said Institute. The resolution plan was approved by the Adjudicating Authority on 15.07.2021, which was challenged by the promoter and the Appellate Tribunal granted stay over operation of the order dated 15.07.2021. The Appellate Tribunal, ultimately, allowed the appeal and apart from disapproving the resolution plan in question, directed the resolution professional to call for the meeting of CoC within 15 days from the date of judgment and to proceed with CIRP from the stage of publication of Form G and put the proposal of promoter before CoC for consideration. In compliance of these directions of NCLAT, eleventh CoC meeting was held on 03.03.2022 where the settlement proposal of the promoter was put to vote in the CoC; the voting continued until 25.03.2022; and ultimately, the said settlement proposal was voted against by 51.81% of the voting share.

# 61. After such rejection of the settlement proposal of the promoter, as we have detailed hereinabove in paragraphs 26.1 to 26.4, proceedings continued in CoC for invitation of fresh EOI and for that purpose, CoC even resolved to seek further time extension to the Adjudicating Authority.

# 61.1. On 29.09.2022, in the eighteenth CoC meeting, it was informed that seven resolution plans had been received and their evaluation was under process but, the CoC members were informed that another settlement proposal was received from the promoter on 19.09.2022. At that stage, again, when the mandatory 330 days’ period was about to end, the CoC members unanimously voted to seek extension of CIRP timelines. Then, on 12.10.2022, the discussion on the settlement proposal of the promoter took place, it was put to vote and was approved by the CoC with 100% of the total voting powers.

# 62. The aforesaid proceedings continued with the matter remaining pending in this Court. The question is, what ought to be the way forward? At the first blush, it may appear that when the settlement proposal has now been approved by the CoC with 100% voting powers in their commercial wisdom, the process thereunder may be allowed to continue as such. However, a blanket approval by this Court at this stage is fraught with other complications.

63. Section 12-A was introduced in the Code later and in accordance with the Insolvency Law Report, March, 2018. This provision was introduced to provide for a mechanism for withdrawal upon settlement which was missing in IBC as originally promulgated. Regulation 30-A was also introduced to the CIRP Regulations. It was further amended with effect from 25.07.2019, providing for withdrawal of CIRP even after issuance of expression of interest but, with the condition that the applicant shall state the reasons justifying withdrawal after issuance of EOI.

# 64. As noticed from various events, even at the threshold stage, the NCLT noticed the settlement proposal on behalf of the corporate debtor but then, found the same to be an eyewash which was put forward only to gain time. The petition was admitted, triggering CIRP. Significantly, the settlement proposal then came up from the promoter only a day before the received resolution plans were to be put to vote, i.e., on 21.01.2021. The CoC, even when not formerly voting on it, clearly rejected the same for the Agenda having already set for dealing with the resolution plan received from the resolution applicant. As noticed, after approval of the resolution plan, the promoter again submitted a settlement proposal but the Institute, said to be supporting the same, subsequently withdrew. After allowing of the appeal by NCLAT and in terms of those directions, the new settlement proposal was precisely put to vote and was rejected. Thereafter, fresh EOIs were invited and resolution plans were received. Significantly, the promoter moved another settlement proposal for invoking Section 12-A of the Code on 19.09.2022, only after receiving of the resolution plans from seven prospective resolution applicants. A pattern in the aforesaid dealings by the promoter is quite striking. When the resolutions plans had been received at the earlier stage, only at the eleventh hour, the settlement proposal came up. This time too, the settlement proposal came up from the promoter only after resolution plans had been received. Prior to it, his proposal had already been rejected. It gets perforce commented that the representative of the corporate debtor being a part of CoC, such proposer is obviously in a position to know about the propositions in the resolution plans when received in response to invitation.

# 65.We have pondered over various facets of this rather ticklish part of the matter because on one hand stands the approval of the re-submitted settlement proposal by 100% voting powers in the CoC and on the other hand, fact of the matter remains that before such settlement proposal, second time EOIs had been invited and in fact, seven resolution plans had been received. As noticed, the earlier settlement proposal from the promoter came up only a day before the resolution plans were to be put to vote, i.e., on 21.01.2021. This time again, the settlement proposals came up from the promoter only on 19.09.2022 after receiving of seven resolution plans from the prospective resolution applicants.

# 66. We are not expanding further on the matter because when we find that the settlement proposal of the promoter, after approval of CoC, for invoking the provisions of Section 12-A of the Code, is pending before the Adjudicating Authority, in our view, it shall be in the fitness of things that all the relevant aspects of the matter are left open for consideration of the Adjudicating Authority, including those relating to the justification for invoking Section 12-A after issuance of fresh invitation for EOI and after receiving resolution plans. In other words, we would leave all the relevant aspects open for consideration of the Adjudicating Authority in accordance with law while keeping in view the observations of this Court.

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