DISTRIBUTION OF PROFIT TO ERSTWHILE PROMOTERS NOT ALLOWED – IBC

Supreme Court in a recent judgment on a bunch of six appeals has held that where neither Request for Resolution Plan (RfRP) nor Resolution Plan (RP) dealt with distribution of  Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) generated during Corporate Insolvency Resolution Proceedings (CIRP), permitting erstwhile promoters or Committee of Creditors (CoC) raise an argument in that regard at such a belated stage would amount to doing violence to very legislative intention with which IBC was enacted analyzing the provisions of sections 30, 31, 32A and 62 of the Insolvency and Bankruptcy Code, 2016 (IBC).  [In Kalyani Transco Versus M/s Bhushan Power And Steel Limited And Others - 2025 (9) TMI 1610 - Supreme Court, arising out of order passed by passed by NCLAT, New Delhi in JSW Steel Ltd., Medi Carrier Pvt. Ltd., CJ Darcl Logistics Ltd. Versus Mahender Kumar Khandelwal & Ors., Resolution Professional of Bhushan Power and Steel Ltd. & Anr. Sanjay Singal & Anr. Versus Punjab National Bank & Ors., Kalyani Transco, State of Odisha & Ors. Versus Bhushan Power & Steel Ltd. Through Resolution Professional & Ors., Jaldhi Overseas Pte. Ltd. Versus Bhushan Power Steel Ltd. & Ors. - 2020 (2) TMI 917 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI.

Facts

According to the facts, in June 2017, the Reserve Bank of India (RBI) identified 12 large corporate defaulters (dirty dozen), including Bhushan Power & Steel Ltd. (BPSL), for initiation of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). On a petition filed by Punjab National Bank, the corporate Insolvency Resolution Process (CIRP) was commenced against BPSL in July, 2017. On 05.09.2019, the NCLT (Principal Bench, New Delhi) approved the resolution plan subject to certain conditions but on 10.10.2019, the Enforcement Directorate (ED) issued a Provisional Attachment Order (PAO) attaching BPSL’s assets, citing money laundering allegations against the erstwhile promoters.

This was challenged by Successful Resolution Applicant (SRA) and other stakeholders by which NCLAT allowed SRA’s appeal modifying conditions including treatment of CIRP period EBITDA and dismissed other appeals, thus affirming the NCLAT order.

The Law

Section 62 deals with appeal to Supreme Court. Accordingly, any person aggrieved by an order of the National Company Law Appellate Tribunal may file an appeal to the Supreme Court on a question of law arising out of such order under this Code within forty-five days from the date of receipt of such order. The Supreme Court may, if it is satisfied that a person was prevented by sufficient cause from filing an appeal within forty-five days, allow the appeal to be filed within a further period not exceeding fifteen days.

The following sections are also relevant in this regard:

Section 30       -           Submission of resolution plan

Section 31       -           Approval of resolution plan

Section 32       -           Appeal

Section 32A    -           Liability for prior offences, etc.

According to Section 32, any appeal from an order approving the resolution plan shall be in the manner and on the grounds laid down in section 61(3) of IBC.

According to Section 32A, notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not—

1. a promoter or in the management or control of the corporate debtor or a related party of such a person; or
2. a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.

But if a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having been fulfilled.

Also, every person who was a “designated partner” as defined in section 2(j) of the Limited Liability Partnership Act, 2008, or an “officer who is in default”, as defined in clause (60) of section 2 of the Companies Act, 2013 or was in any manner incharge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority, shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor notwithstanding that the corporate debtors liability has ceased under this sub-section.

No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process of the corporate debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under section 31, which results in the change in control of the corporate debtor to a person, or sale of liquidation assets under the provisions of Chapter III of Part II of this Code to a person, who was not—

1. a promoter or in the management or control of the corporate debtor or a related party of such a person; or
2. a person with regard to whom the relevant investigating authority has, on the basis of material in its possession reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.

It has also been hereby clarified in law itself that:

1. an action against the property of the corporate debtor in relation to an offence shall include the attachment, seizure, retention or confiscation of such property under such law as may be applicable to the corporate debtor;
2. nothing in this sub-section shall be construed to bar an action against the property of any person, other than the corporate debtor or a person who has acquired such property through corporate insolvency resolution process or liquidation process under this Code and fulfils the requirements specified in this section, against whom such an action may be taken under such law as may be applicable.

Observations and Interpretation

At the outset, apex court observed that on a perusal of the preamble of the IBC, it can be seen that the IBC was brought in to consolidate the laws related to the reorganization and insolvency resolution of corporate persons in a time - bound manner which would result in the promotion of entrepreneurship and the balancing of the interests of all shareholders. The main purpose of the enactment therefore is to ensure that the company undergoing insolvency proceedings is revived or liquidated expeditiously within a stipulated timeframe. On a bare perusal of section 62, it is clear that the interpretation of the term person aggrieved is not limited or defined. However, the objectives of the IBC itself must be kept in mind while interpreting the said term. A bare perusal of section 12 reveals that precise timelines have been provided for all the different steps that have to be taken during the CIRP of a company. The proviso to section 12 states that any extension to the fixed timelines may not be granted more than once. This further shows that the IBC does not allow any undue delays in the completion of the CIRP of a company.  It is thus clear that the IBC proposes to carry out the Resolution Process of a Company expeditiously in a time - bound fashion.

Further, apex court observed that one of the integral objectives of the IBC is to ensure that the interests of the company undergoing CIRP are not influenced by the interests of the erstwhile management and that this can only be achieved by applying a purposive interpretation to the provisions of the Code by not permitting the problems of the earlier regime to enter the resolved/revived entity through the backdoor.

Apex Court observed and held that the appeal filed by the ED was disposed of by Court vide Order dated 11-12-2024 and the ED was directed to handover the unencumbered assets of the Corporate Debtor to the SRA.  It was thus seen that the contention of the appellants that there was inordinate and deliberate delay in implementing the Resolution Plan by the SRA is without substance. It was also seen that on account of various factors like the NCLT directing the EBITDA to be shared with the creditors, the NCLAT in an appeal staying the order of the NCLT, after the decision of the NCLAT the pendency of the proceedings before Apex Court, and the PAO being passed by the ED with regard to properties of the Corporate Debtor, the implementation of the Resolution Plan was jeopardized. Only after the Apex Court disposed of the appeal filed by the ED on 11-12-2024, there was a clarity with regard to various issues.

It can be seen that Apex Court had, in unequivocal terms, held that a successful resolution applicant cannot be faced with 'undecided' claims after the resolution plan submitted by it has been accepted as that would amount to 'hydra heads popping up' which would throw into uncertainty the amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. This Court has, in unambiguous terms, held that the RfRP issued in terms of section 25 of the IBC and considered by the CoC had provided that distribution of profits made during the CIRP would not go towards payment of debts of any creditor. Apex Court, therefore, set aside the judgment of the NCLAT in Essar Steel (supra) in that regard.

The issue was held to be no more res integra. In case of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory Versus Satish Kumar Gupta & Others - 2019 (11) TMI 731 - Supreme Court, it was clearly held that such could not have been the intention of the legislature as this would amount to hydra heads popping up after the approval of the resolution plan. It was categorically held that the SRA cannot be forced to deal with claims that are not a part of the RfRP issued in terms of section 25 of the IBC or a part of its resolution plan.

No doubt that if RfRP had specifically dealt with the manner in which the EBITDA would be distributed, it would have been a different matter but in the present case, neither the RfRP nor the resolution plan dealt with it. Permitting the erstwhile promoters or the CoC to raise an argument in that regard at such a belated stage would amount to doing violence to the very intention with which the IBC was enacted.

Final Word

Therefore, no merit was found in the contention of either the ex-promoters-cum-directors of the corporate debtor or the CoC. It was thus held that if such a contention is accepted, it will only frustrate the very purpose for which the IBC came to be enacted. The appeals were therefore, dismissed and NCLAT order upheld / affirmed.