The Supreme Court confirmed that the ineligibility of a resolution applicant under Section 164(2)(b) of the Companies Act, 2013 cannot be presumed unless the competent authority declares the disqualification.
The Court held that such an interpretation is necessary to ensure that the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”), is not misused by promoters or directors of companies who may be disqualified under the Companies Act but seek to participate in the insolvency resolution process.
Brief Facts:
Appu Hotels Limited (hereinafter referred to as “AHL”), a limited company, had a promoter group of around one hundred non-resident investors living in the United States of America who had invested over twenty-two million US dollars in foreign exchange in the corporate debtor. The corporate debtor had taken project loans from a consortium of bankers led by the Indian Bank to construct ‘Le Meridian’. However, the business did not materialise as per the estimated projections. The hotel was making an operational profit, but it was insufficient to repay the loan.
The corporate debtor defaulted in overdue payment, initiating the Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”). One of the financial creditors, Tourism Finance Corporation of India Limited (hereinafter referred to as “TFCI”), who holds about 5% of the total loan amount, applied under Section 7 of the IBC for the initiation of CIRP before the NCLT, which was admitted, and an interim resolution professional was appointed. Various steps were taken regarding the requirements of the IBC and the CIRP Regulations, including the meetings of the Committee of Creditors (hereinafter referred to as “CoC”), which ultimately led to the approval of the resolution plan in question.
The Civil Appeals were filed before the Supreme Court challenging the impugned judgment and order passed by the National Company Law Appellate Tribunal (hereinafter referred to as “NCLAT”). The suit was related to a batch of appeals concerning the Corporate Insolvency Resolution Process under the IBC. The Appellate Tribunal had reversed the order, as passed by the National Company Law Tribunal (hereinafter referred to as “NCLT”).
Brief Background:
The case originated in an application against a corporate debtor under Section 7 of the IBC, which the NCLT admitted. After several rounds of CoC meetings, the resolution plan was approved with a majority voting share. However, the CoC recommended changes to the plan, and after incorporating them, an application was made for its approval under Section 30(6) of IBC. The NCLT approved the plan after dismissing all objections.
However, this decision was challenged when several appeals were filed before the NCLAT. The NCLAT allowed the appeals and directed the resolution professional to proceed with CIRP from the publication stage of Form ‘G’ while inviting Expressions of Interest afresh per the CIRP Regulations.
Appellant No. 1 (hereinafter referred to as “Resolution Applicant”) and Appellant No. 2 (hereinafter referred to as “Resolution Professional”) contested the NCLAT's decision before the court. During the hearing, it was revealed that another CoC meeting had occurred, and the promoter's settlement proposal was voted against. The court reserved judgment and noted that the CoC meetings could continue, but the process would remain subject to the final orders to be passed in these appeals. Later, the Resolution Applicant sought directions from the court for certain issues, including the fresh process initiated by the Resolution Professional by the publication of Form G, inviting fresh Expressions of Interest.
Contentions of the Appellants:
It was argued that the promoter had no right to file for withdrawal under Section 12-A of the IBC and that their eligibility as a Resolution Applicant could not be disqualified under Section 29-A of the IBC based on the Trust Act, 1882 (hereinafter referred to as “Trust Act”). Further, the resolution plan could not be set aside solely based on the contention that the valuation was lower than the liquidation value. The scope of interference concerning the successful resolution plan was extremely narrow. The challenge was limited only to matters ‘other than’ inquiry into the autonomy or commercial wisdom of the CoC.
The CoC rejected the promoter's application to bring on record the following facts, so the only course available was to continue with a fresh CIRP. The settlement proposal submitted by the corporate debtor was not per the mandate specified under Regulation 30-A of the CIRP regulations read with Section 12-A of IBC.
It was also argued that the Resolution Professional had fulfilled their responsibility under Regulation 35(2) of the CIRP Regulations by sharing the fair value and liquidation value with the CoC members after obtaining a confidentiality undertaking. It was claimed that the request for an increase in the fee of Resolution Professional was made with reasons for revision much prior to the date on which the CoC approved the resolution plan.
The issue of the ineligibility of the Resolution Applicant was not raised before NCLT, but NCLAT held them ineligible in its impugned order. The Resolution Professional could have only carried out a public domain search and considered the affidavit of compliance submitted by the Resolution Applicant in view of Regulation 39 of the CIRP Regulations.
Contentions of the Respondents:
It was claimed that the CoC had not considered the promoter's settlement proposals to withdraw from the CIRP under Section 12-A of the IBC. Additionally, it was argued that the resolution plan undervalued the corporate debtor's assets and violated Sections 88 of the Trusts Act and Section 164(2)(b) of the Act, 2013.
It was further contended that the resolution plan was not placed before the CoC after it was revised and that there was no provision for post facto ratification of a resolution plan. Moreover, the shareholders do not have the right to intervene in the CIRP process, and related parties should not be treated as a separate class for payment of dues under the resolution plan.
Contentions of the Third Party:
It was contended that the bank had already approved the resolution plan submitted by the Resolution Applicant, which had 87.39% of the voting share in the CoC. Further, that the bank’s main priority was to resolve the CIRP within a definite time frame, and any delay would result in the deterioration of the asset value. The CoC had taken steps in furtherance of the impugned order, so they requested that the CoC be allowed to continue with the CIRP from the stage of fresh issuance of Form G and determine the eligibility of the appellant independently without the influence of the NCLAT's observations.
It was also argued that the approval could not have been set aside merely for the non-consideration of the revised resolution plan, which was revised at the instance of the CoC itself.
Observations of the Court:
The Supreme Court opined that the Managing Trustee of a charitable trust, also the Resolution Applicant, was disqualified from submitting a resolution plan due to his inability to run a profit-making entity. The Court noted that the Resolution Applicant was closely associated with the trust. Any financial gain from the resolution plan would be subject to Section 88 of the Trusts Act, which invalidated the plan. The Court also found that the Resolution Applicant's actions would impact the activities of another company, creating a conflict of interest under Section 166(4) of the Act, 2013. Thus, the Resolution Applicant was deemed ineligible.
The Court emphasised the importance of the Commercial wisdom of the Committee of Creditors in approving a resolution plan and considering all aspects before approving it. The revised plan was not presented to the CoC before it was submitted to the Adjudicating Authority, which the NCLAT did not approve.
The Court also held that the treatment of related parties in the resolution plan and the settlement offer of the promoter were not illegal. Additionally, the valuation reports and the lack of publication of Form G were not material to the process. The Adjudicating Authority was tasked with considering subsequent events related to the invitation of fresh Expressions of Interest and the CoC's approval of the fresh settlement proposal. Ultimately, the Apex Court held the resolution plan invalid due to the ineligibility of the Resolution Applicant and the failure to follow proper procedures.
The decision of the Court:
The Supreme Court confirmed the decision of the NCLAT regarding the non-approval of the resolution plan by the Tribunal, as it was consistent with the reasons given by the Supreme Court. However, the Appellate Tribunal's other findings, observations, and directions were dismissed.
The Supreme Court left the decision on the fresh settlement proposal, which the CoC approved in its nineteenth meeting after receiving fresh resolution plans, to the Adjudicating Authority. The Adjudicating Authority was expected to consider this aspect of the case while taking into account the relevant law, the facts of the case, and the Supreme Court's observations.
Case Title: M.K Rajagopalan v Dr. Periasamy Palani Gounder & Anr.
Case No.: Civil Appeal No. 1682-1683 of 2022
Citation: 2023 Latest Caselaw 453 SC
Coram: Hon’ble Mr. Justice Dinesh Maheshwari and Hon’ble Mr. Justice Vikram Nath
Advocates for Petitioner: Advs. Dr. Abhishek Manu Singhvi, Mr. Jaideep Gupta, Mr. Devashish Bharuka, Mr. Justine George, Ms. Sarvshree, Mr. Abhijeeet Singh, Adv.
Advocates for Respondent: Advs.Mr. K.V. Vishwanathan, Mr. Goutham Shivshankar, Mr. Vijay Narayan, Mr. T. Ravichandran, Mr. K.V. Mohan, Mr. K.V. Balakrishnan, Adv., Ms. Niveditha, Ms. Samyuktha J. Mr. Rahul Kumar Sharma, Mr. Shreeyash U. Lalit, Ms. Raveena Lalit, Mr. Abhinav Agarwal, Mrs. Pragya Baghel, Ms. Haripriya Padmanabhan, Mr. V.Syamohan, Ms. Astu Khandelwal, Mr. Martin G. George
Advocates for the Third Party: Advs. Mr. Tushar Mehta, Mr. Sanjay Kapur, Ms. Megha Karnwal, Mr. Arjun Bhatia, Ms. Akshata Joshi, Ms. Shubra Kapur, Ms. Aastha Gumbr, Adv.
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