NCLT- IN THE GARB OF MAXIMIZATION OF VALUE, CAN RESOLUTION PROCESS BE DEFERRED?

 

NCLT- In the garb of maximization of value, can Resolution process be deferred?

 

The National Company Law Tribunals (NCLTs) are constituted inter alia to deal with sale of assets in dissolution process of corporate debtor company and as a prelude thereto, the prospect of rehabilitation of the corporate debtor (CD) company including its taking over as a going concern by the prospective bidders are mooted and resolution professional (RP) is appointed for seeking bid from resolution applicant. The Committee of Creditors (CoC) are appointed amongst the creditors to the corporate debtor and resolution professional invites the proposal from the prospective resolution applicants (PRAs) and proposals submitted by prospective resolution applicants  are scrutinized by Resolution Professional and CoC for finalizing the resolution process and for approval of resolution process before the Adjudicating Authority (AA). Of course, if resolution process fails, then process of dissolution may start. The present write up however remains confined to resolution process. It is also obvious that the underlying object of the IBC is to facilitate the rehabilitation of corporate debtor company, preferably as a going concern, therefore, the resolution process assumes significance. What is also important in this context is to achieve the objective of resolution process so as to ensure the maximization of assets of corporate debtor company within the stipulated time frame as per the IBC Code. What are the fetters to that and law enunciated in this regard shall be analysed hereinafter.

In the perspective, it may be worthwhile to cull out the details in a matter captioned as Jindal Power Limited Vs Dhiren Shantilal Shah & Ors Company Appeal (AT) (Insolvency) No. 1166-1167 of 2023 the NCLAT (National Company Law Appellate Tribunal). The NCLAT while adjudicating appeal filed against the NCLT, Mumbai, has dealt with the issue of maximization of value of corporate debtor company in resolution plan and whether CIRP (Corporate Insolvency Resolution process) can be deferred beyond stipulated time frame as per IBC Code and ruled framed thereunder.

The issue before the Appellate Tribunal was to determine whether the Appellant, namely Jindal Power Limited (“JPL”) could be allowed to submit a resolution plan for value maximization of the Corporate Debtor (Tuticorin Coal Terminal Pvt) under the existing provisions of the Code and the Regulations, particularly, Regulation 39(1-B) read with Regulation 36-B(7) of IBBI (CIRP) Regulations, 2016.

To put in perspective, the Appeal was filed by “JPL” under Section 61 of the IBC Code 2016 against the impugned Order dated 22.08.2023 passed by the National Company Law Tribunal, Mumbai Bench – IV (“Adjudicating Authority” or “AA”) which has held that the Appellant was ineligible to submit a Resolution Plan for the Corporate Debtor. The Appellant has also further challenged the Order dated 27.07.2023 to the extent that the Adjudicating Authority Adjudicating Authority has wrongly disallowed JPL from submitting a resolution plan for the Corporate Debtor, on account of a purported statutory bar under Regulation 39(1-B) read with Regulation 36-B(7) of the Insolvency and Bankruptcy Board of India(IBBI) & (Insolvency Resolution Process of Corporate Persons) Regulations, 2016 (“CIRP Regulations’”), as per which a resolution plan for a Corporate Debtor cannot be received from a person, who does not appear in the final list of prospective resolution applicants published by a Resolution Professional under Regulation 36-A(12) of the CIRP Regulations, 2016.

 

                                  The factual matrix

The Corporate Debtor viz. Tuticorin Coal Terminal Pvt. Ltd. is a company (formed as Special Purpose Vehicle-SPV) and was engaged in the business of development of North Cargo Berth II for handling bulk cargo at Tuticorin Port on Design, Build, Finance, Operate and Transfer (DBFOT) basis. A  proceeding under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“Code”) was initiated in 2019 against the Corporate Debtor by Bank of India, being one of its financial creditors, before the Adjudicating Authority(AA). The Adjudicating Authority in its order dated 20.02.2020 allowed the Section 7 Petition and initiated CIRP proceeding against the Corporate Debtor. The Adjudicating Authority had also appointed  Interim Resolution Professional (“IRP”), who was later confirmed as a Resolution Professional (“RP”) by the Committee of Creditors (“CoC”) on 20.02.2020. It is a matter of record that on 08.09.2020, the RP had issued an “Invitation for Resolution Plan” (“Form G”) under Regulation 36-A of the CIRP Regulations. On 06.10.2020 timelines for submission of Expression of Interest (“EoI”) and issuance of final list of Prospective Resolution Applicants (PRAs) was extended to 12.10.2020 and 31.10.2020 respectively.

The RP had received seven (7) EoIs from Prospective Resolution Applicants (“PRAs”) for submission of a resolution plan for the Corporate Debtor. Out of seven (7) EOIs, only six (6) were eligible PRAs. The Final list was issued under Regulation 36-A(12) with six (6) PRAs in the final list. In the year 2021, RP received resolution plans only from two (2) PRAs out of the final list of PRAs. These were presented before the CoC, but were not accepted by the CoC. Thereafter, RP filed application on 20.08.2021 seeking liquidation of the Corporate Debtor. During the pendency of the Liquidation Application, another application was filed by M/s SEAHAWK (SHAL Group). The SEAHAWK was not in the final list of PRAs seeking submission of a resolution plan for the Corporate Debtor.

The AA vide order dated 29.11.2022 was pleased to allow the application by noting as under:

“This is an application filed by the Resolution Applicant for seeking relief of the Committee of Creditor (COC) to consider the Resolution Plan. The RP is directed to submit the Resolution Plan, submitted by the Proposed Resolution Applicant before the CoC and further, COC is directed to consider the Resolution Plan which is submitted by the Applicant as per Law”.

Accordingly, M/s SEAHAWK was given an opportunity to submit a resolution plan for the Corporate Debtor, however, no resolution plan was submitted by SEAHAWK even till 04.01.2024 and no such resolution plan was placed before the CoC for consideration or approval. Further according to RP M/s SEAPOL was just an “Intervenor” and its claim that CoC had rejected the resolution plan submitted by M/s SEAHAWK due to the fact that it was in contravention and in violation of Regulation 39(1-B) and Regulation 36-B(7) of the CIRP Regulations was factually incorrect and without any basis. The intervenor is merely a prospective resolution applicant, who is not privy to the discussions in the meetings of the CoC or has access to information concerning the resolution plans submitted to the RP.

In the meanwhile, yet another Interlocutory Application was filed by the M/s SEAPOL, which was one of the PRAs in the final list of PRAs, seeking submission of a resolution plan for the Corporate Debtor.

The AA vide order dated 09.01.2023, was pleased to allow the I.A. No.3535 of 2022 with following term:

“Learned Counsel for the Applicant submits that they have submitted the proposed resolution plan with the RP. However, the same was not considered and now the Liquidation Application is filed….” And held “This bench directs the RP to withdraw the Liquidation Application and put the proposed Resolution Plan before the CoC for consideration.”

Thus, the Liquidation Application was dismissed as withdrawn and M/s SEAPOL was given an opportunity to submit the resolution plan for the Corporate Debtor. Pursuant to the 09.01.2023 order M/s SEAPOL submitted their resolution plan for the Corporate Debtor on 18.02.2023.

The JPL on 12.07.2023 sent an EoI for the Corporate Debtor to the RP showing its interest to participate in the CIRP process of the Corporate Debtor. At that time RP was considering the proposals of M/s SEAPOL and a proposal of M/s VOCPA (which was submitted under the guidelines for dealing with stressed Public Private Partnership Projects (PPP) at Major Ports). However, RP/CoC did not approve the proposal of M/s VOCPA. Further, RP could not have suo-moto considered the EOI of JPL, since the last date for receipt of EoI had already lapsed.

Therefore, on 14.07.2023 the RP placed the EoI before 45th Meeting of CoC. However, considering the restrictions in Regulation 39(1-B) of the CIRP Regulations, the RP suggested the Appellant to take appropriate directions from the Adjudicating Authority. Pursuant to this, on 21.07.2023, the Appellant, therefore had  filed I.A No. 3223 of 2023 with the Adjudicating Authority inter alia seeking permission to submit a Resolution Plan. By the 27.07.2023 order the Adjudicating Authority allowed and disposed of this I.A. passed the following order:

“In view of these facts, this Bench feels that the Applicant in IA- 3223/2023 be allowed an opportunity to submit the Resolution Plan, considering that the Court intends to maximise the value. However, this opportunity shall be subject to compliance with the provisions contained in Regulation 39(1)(b) r/w 36B(7) of CIRP Regulations, which stipulates that such Applicant should be one of Resolution Applicants in the final list of prospective Resolution Applicants and the RP will extend the time line for submission of Resolution Plan after approval of CoC”. (Emphasis Supplied)

The Appellant has also challenged the above Order dated 27.07.2023 passed in I.A. No. 3223 of 2023, in as much as, even though, the Adjudicating Authority had allowed it to submit a resolution plan for the Corporate Debtor, but it was subject to compliance with Regulation 39(1-B) read with Regulation 36-B(7), which stipulates that Appellant should be in the final list of the PRAs.

Faced with above, the Resolution Professional (RP) had also sought clarification from AA alleging contradiction in the 27th July order, i.e. on one hand, it allowed submission of resolution plan by JPL for maximisation of the value of the assets of the Corporate Debtor as per preamble of the code, yet on the other hand sought compliance of Regulation 39(1-B) and Regulation 36-B(7) of the CIRP Regulations. Therefore, RP requested JPL to seek clarification of the 27th July order. However, the JPL stated that RP is required to re-issue the RFRP (with the approval of the CoC) in terms of Regulation 36-B(7) of the CIRP Regulations to the PRAs appearing in the final list of PRAs published by the RP, which according to JPL should now include its name also, by virtue of the 27th July order.

Grounds of AppeAL

The main ground of JPL is that by accepting the resolution plan it will maximise the value of the assets of the Corporate Debtor, which is in line with the primary objective of the Insolvency and Bankruptcy Code, 2023 (“Code”). The order dated 22.08.2023 of the Adjudicating Authority is contrary to the preamble and to the objective of the Code, which is to maximise the value of the assets of the corporate debtor. It also raises the issue that due to change in economic conditions since 31.10.2022, there may be now more participants, who could be interested in participating in the CIRP, including the Appellant which would help in maximising the value of the Corporate Debtor.

It also raises the issue that the Adjudicating Authority, vide its order dated 29.11.2022, had allowed M/s SEAHAWK to submit its resolution plan even though it was not in the final list of the PRAs. Further, M/s SEAPOL had initially missed the prescribed period to submit its resolution plan, which was later allowed with the permission of Adjudicating Authority and it finalised its submission, with multiple revisions only on 22.08.2023.

The Appellant also relied upon following judgments:

i. Kalpraj Dharamshi Vs. Kotak Investment Advisors Ltd. (2021) 10 SCC 401 wherein the Hon’ble Supreme Court held that the commercial wisdom of the CoC is paramount and any decision of the CoC before the expiry of the timeline specified under the I&B Code is sacrosanct.

ii. Vistra ITCL (India) Ltd. Vs. Torrent Investments Pvt. Ltd. dated 02.03.2020 in CA(AT) (Ins) No. 132, 133 & 134 of 2023 wherein NCLAT held that the CIRP Regulations cannot be read as a fetter on the power of the CoC to discuss and deliberate and take further steps of negotiations with the resolution applicants.

iii. Ramneek Goel Vs. Sunil Bajab & Ors. 2023 SCC OnLine NCLAT 515 has also held that any EOI submitted prior to the expiry of 330 days of the CIRP process can be considered by the CoC, if it is in the interest of stakeholders to achieve value maximisation. Further, the Appellant submits that EoI was submitted on 12.07.2023 by the Appellant, which was within 270 days of the CIRP process.

According to appellant, the Regulations cannot be read as a fetter on the power of the CoC, to discuss and deliberate and take further steps of negotiation with the resolution applicants. As presently only one plan i.e. of M/s SEAPOL was in consideration, and the revised plan was submitted by M/s SEAPOL as recently as on 22.08.2023 and since RP has stated that with the approval of CoC, it will give an opportunity to M/s SEAPOL also, to revise its resolution plan once again - in the event applicant is granted an opportunity to submit a resolution plan, therefore, the Adjudicating Authority can take a facilitative step towards greater participation to secure maximisation of the value rather than shut the doors to prospective applicants offering better value to the CoC and other stakeholders.

COC

The CoC supported the appeal of JPL while maintaining that the overarching legislative intent of the Code is resolution of the corporate debtor and at the same time maximization of value and relied upon a judgment rendered by a learned 3 Judge bench of the  Supreme Court in the matter of Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., reported in (2021) 3 SCC 475. It was also submitted that consideration of an additional plan would be in the interest of value maximisation and would afford the Committee of Creditors to choose between the plan that better sub serves the primary consideration of value maximisation of the assets of the corporate debtor.

                  Issue before the Tribunal (NCLAT)

The issue before the NCLAT was to determine whether JPL  could be allowed to submit a resolution plan for value maximization of the Corporate Debtor under the existing provisions of the Code and the Regulations, particularly Regulation 39(1-B) read with Regulation 36-B(7) of IBBI (CIRP) Regulations, 2016.

(1) The NCLAT has observed that the Adjudicating Authority has consistently allowed opportunity to all the resolution applicants as long as they were as per law. In the first case of M/s SEAHAWK, the order clearly states that the CoC is directed to consider the resolution plan, which is submitted by the Applicant as per law and subsequently when JPL approached the Adjudicating Authority, it again acknowledged that an opportunity be given to submit the resolution plan to maximise the value of Corporate Debtor asset. However, this opportunity was subject to compliance with the provisions contained in Regulation 39(1-B) read with Regulation 36-B(7) IBBI (CIRP) Regulations, 2016. In the first case, even though opportunity was given to M/s SEAHAWK, it is confirmed by the RP that the resolution plan was not submitted. The claim of SRA viz. SEPOL that this resolution plan was rejected by the RP/COC on the same ground that it is not in compliance with the provisions contained in Regulation 39(1-B) read with Regulation 36-B(7) IBBI (CIRP) Regulations, 2016 and now in the case of JPL they have changed their stand and recommended for resolution plan to be considered.

(2) The stand taken by the Adjudicating Authority however has been consistent in both the cases of SEAHAWK and SEAPAL. In fact RP and CoC have taken a stand which is contravention of the Regulation 39(1-B) read with Regulation 36-B(7) IBBI (CIRP) Regulations, 2016. In the case of M/s SEAPOL Adjudicating Authority clearly ordered that it did not want to indulge into the commercial wisdom of the CoC, with the rider that let it be in compliance with the provisions contained in Regulation 39(1-B) read with Regulation 36B(7) of the CIRP Regulations.

(3) The concerned Regulations do not permit the proposals to be entertained which are not there in the final list of the PRAs and the Adjudicating Authority has acted as per this provisions. The Adjudicating Authority gave the opportunity, but it was subject to compliance with the provisions contained in Regulation 39(1-B) read with Regulation 36B(7) of CIRP Regulations.

In Ramneek Goel (Supra) NCLAT in para 13 it is observed as under:

“..13. There can be no dispute to the law laid down by the Hon’ble Supreme Court that 330 days is the maximum period provided by the Code for the completion of CIRP. The present is a case where 300 days were expiring on 15.04.2021 and prior to expiry of the 300 days period, a decision was taken to re-publish Form-G. The CoC has reason to take a decision since they received an email from Respondent No.1 offering higher value. The objective of the IBC is to maximize the value of the Corporate Debtor and decision taken by the CoC to republish Form-G cannot be faulted in the facts of the present case…”

In para no. 30 & 31 it is held by NCLAT as under:

30. The justification of the Appellant, and supported by RP/CoC, that by accepting its resolution plan, it maximises the value of the assets of the Corporate Debtor and it is in alignment of the primary objective of the Insolvency and Bankruptcy Code, 2023 (“Code”), cannot be accepted by giving a go by to the Code and particularly Regulations. Firstly, both AA and the Appellate Authority are bound by the Code and Regulations. Secondly, the Apex Court’s judgement relied upon by the Appellant of Kalpraj Dharamshi Vs. Kotak Investment Advisors Ltd. reported in (2021) 10 SCC 401 may not be of any help. This judgment holds that the commercial wisdom of the CoC is paramount and any decision of the CoC before the expiry of the timeline specified under the I&B Code is sacrosanct. And in this case CoC has applied its wisdom and AA has not questioned it as long as the process of resolution plan was not in violation of the Regulations. As and when the RP/CoC recommended in contravention of the Regulations, it was not agreed to by the AA. This is not the commercial wisdom which has been not agreed to by the AA, but the violation of the Regulations. Furthermore, we agree that in the name of the shelter of maximisation of value of assets and commercial wisdom, RP/CoC cannot be permitted to take any decision at any point of time, which is in contravention to the CIRP Regulations”.

31. If unsolicited plans are obtained at any stage it will cause unnecessary avoidable delay in the CIRP process. If resolution plans are allowed to be submitted at any stage, it will make the whole CIRP process unending. To curtail the delay in the CIRP process, it is appropriate to restrain the tendency to consider resolution plans after the time as specified by the CoC and from someone not in the final list of PRAs. This has been the spirit and justification of newly inserted provisions in the Regulations in 2021 and which has been eloquently described in the Discussion Paper of the IBBI, before changes were brought in and which have also been referred to by SRA viz. SEAPOL.

 

(4) The judgment of Kalpraj Dharamshi Vs. Kotak Investment Advisors Ltd. made serious efforts that the CD doesn’t  enter into liquidation and resolution plan as worked out for the maximization of the value of the CD. It first reversed the liquidation orders and allowed resolution plans of SEAHAWK to be considered and then later on resolution plans of SEAPOL and then finally that of JPL, but all that were to be dealt with as per law. As the Regulations did not allow the case of JPL to be allowed by AA, the NCLAT had thus upheld the order of NCLT. The NCLAT had also dealt with the cited judgment captioned as Vistra Ltd. ITCL (India) Ltd. vs. Torrent Investments Pvt. Ltd. & Ors. CA(AT) (Insolvency) No.132, 133 & 134 of 2023 passed by NCLAT. However, it was held that the said judgment was not relevant on the facts of the case, in as much as the above referred judgment deals with Regulation 39(1-A)(b) of CIRP Regulations, whereas presently, in JPL  Regulation 39(1-B) read with Regulation 36B(7) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) Regulations, 2016 was being dealt with.

It is thus held by the NCLAT in para no. 31 and 35, as under:

31.“If unsolicited plans are obtained at any stage it will cause unnecessary avoidable delay in the CIRP process. If resolution plans are allowed to be submitted at any stage, it will make the whole CIRP process unending. To curtail the delay in the CIRP process, it is appropriate to restrain the tendency to consider resolution plans after the time as specified by the CoC and from someone not in the final list of PRAs. This has been the spirit and justification of newly inserted provisions in the Regulations in 2021 and which has been eloquently described in the Discussion Paper of the IBBI, before changes were brought in and which have also been referred to by SRA viz. SEAPOL”.

35. No doubt the whole process prescribed in the Code and supported by Regulations aims at maximization of the value for the Corporate Debtor but it cannot give a go by to the existing specific Regulations as discussed above. In the present case the matter has been reversed from the stage of liquidation and one of the PRA in the final list has been given an opportunity to file its resolution plan and which is to be accepted or rejected by the CoC. Maximisation of the value of the Corporate Debtor can be ensured by other means also, particularly by conducting CIRP in a time-bound manner, simultaneously complying with existing regulations and not bypassing them. The Resolution plans, which enter midway and which were not in the final list of PRAs derail and delay the CIRP proceedings and this has also been noted in the background Discussion paper, before the introduction of new Regulations in 2021.”

(5)     The NCLAT has therefore concluded that the Appellate Authority are bound by the Code and Regulations. Secondly, the Apex Court’s judgment relied upon by the Appellant of Kalpraj Dharamshi Vs. Kotak Investment Advisors Ltd. reported in (2021) 10 SCC 401 may not be of any help. This judgment holds that the commercial wisdom of the CoC is paramount and any decision of the CoC before the expiry of the timeline specified under the I&B Code is sacrosanct. And in this case CoC has applied its wisdom and AA has not questioned it, as long as the process of resolution plan was not in violation of the Regulations. As and when the RP/CoC recommended in contravention of the Regulations, it was not agreed to by the AA. This is not the commercial wisdom which has been not agreed to by the AA, but the violation of the Regulations. Furthermore, the NCLAT agreed that in the name of the shelter of maximisation of value of assets and commercial wisdom, RP/CoC cannot be permitted to take any decision at any point of time, which is in contravention to the CIRP Regulations.

In view of the aforesaid, the Principal bench of NCLAT was therefore pleased to dismiss the appeal of JPL and has further held that in case resolution plan is extended beyond a point would mean contravention and violation of Regulation 39(1- B) read with Regulation 36-B(7) of IBBI (CIRP) Regulations, 2016.

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                                  Anil K Khaware

                                  Founder & Senior Associate 

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