2022 (1) TMI 1382 - AT - Insolvency and Bankruptcy

Tribunal decision: Vendor payments during insolvency process are essential costs

Union Bank of India (Erstwhile Corporation Bank) Versus Mr Dinkar T. Venkatasubramanian, DVI PE (Mauritius) Ltd, Deccan Value Investors LP

The Tribunal partly allowed the appeal, directing the Resolution Professional not to deduct Rs. 34 crores from the final payment to the Appellant, ... Seeking direction for modification of the Approved Resolution Plan of Respondent No. 2 and 3, in compliance with Regulations 42 and 44 of the liquidation Process Regulation 2016 - Non-deduction of ₹ 34 crores from the final payment to be made to the Applicant/Appellant as per the scheme of distribution from out of the amount under the Resolution Plan - HELD THAT:- It is important to mention that the resolution professional admits in its Reply that it had suggested the COC two options to either treat the illegal recovery is made by the Appellant as interim finance under the IB Code or sent to deduction of the amount of illegally recovered amount by the Appellant, out of distribution amount payable to the Appellant under the Resolution Plan. Accordingly, the COC, upon deliberation, consented to deduction of the said amount from the distribution amount owed to the Appellant under the Resolution Plan submitted by Respondents No. 2 & 3 in the 30th and 31st Meeting of the COC held on 5 February 2020 on 7 February 2020 respectively. It is further necessary to mention that the Resolution Professional has in its Reply admitted that in terms of duty cost upon him under Sections 20 and 25 of the Code to continue and maintain the business of the Corporate Debtor as a going concern, it had requested the Appellant to continue and sustain the Non-Fund-Based Facility NBF Facility limits at the existing level at being drawn by the Corporate Debtor prior to the insolvency commencement date. The said request was made on account of the business requirement of the Corporate Debtor - It is pertinent to mention that Section 25 of the Code provides the duties of the Resolution Professional. Under Section 25(2)(c), the RP must raise interim finance subject to the approval of the Committee of Creditors under Section 28 of the Code. Further, under Section 20 (2) (1) &(2)(c) of the Code, the IRP/RP is duty-bound to make every endeavour to protect and preserve the value of the property of the Corporate Debtor and manage the operations of the Corporate Debtor as a going concern. For this purpose, IRP/RP is entitled to raise interim finance. In the instant case, Resolution Professional has admitted that it had suggested the COC two options, to either treat the recovery made by the Appellant as interim finance under IB code or deduct the amount illegally recovered by the Appellant, out of distribution amount payable to the Appellant under the Resolution Plan. Thus, it is clear that RP failed to exercise its jurisdiction to decide the issue of CIRP cost and left it to the CoC to decide whether the amount incurred in keeping the Corporate Debtor as a going concern, by the continuation of letter of credit bank guarantee facility during the CIRP would be treated as interim finance. However, it was the duty of IRP/RP itself to decide the CIRP cost. After that, instead of taking advice from the COC for treating the said expenses as interim finance, he should have obtained sanction from the CoC for making the payment of the expenses incurred during the CIRP. It is clear that the Appellant never recovered any amount from the payment of ₹ 34 crores, as has been misrepresented by Respondent No. 1. The Adjudicating Authority vide its impugned Order observed that the Appellant has not objected to the said actions of Respondent No. 1 in the COC meetings is contrary to the materials placed before the Adjudicating Authority. Furthermore, the Appellant had refuted the actions of respondent No. 1 vide its Email dated 20 February 2020, which the Adjudicating Authority has overlooked - Appeal allowed in part. Issues Involved:1. Modification of the Approved Resolution Plan.2. Compliance with Regulations 42 and 44 of the Liquidation Process Regulation 2016.3. Deduction of Rs. 34 crores from the final payment to the Appellant.4. Inclusion of amounts towards LC payments and Bank Guarantee payments in the total admitted claim of the Appellant.5. Classification of the Non-Fund Based Facility as financial debt.6. Treatment of the amount paid to vendors during CIRP as interim finance or CIRP cost.7. Role and responsibilities of the Resolution Professional and Committee of Creditors.Analysis of Judgment:1. Modification of the Approved Resolution Plan:The Appellant sought modification of the Approved Resolution Plan to comply with Regulations 42 and 44 of the Liquidation Process Regulation 2016. The Adjudicating Authority rejected this request, stating that the decisions of the Committee of Creditors (CoC) passed with the required majority percentage are binding on all stakeholders, including dissenting members.2. Compliance with Regulations 42 and 44 of the Liquidation Process Regulation 2016:The Appellant argued that the Resolution Plan did not comply with Regulations 42 and 44, which pertain to the distribution of proceeds and completion of liquidation. The Tribunal noted that the CoC's decisions are binding, and the Adjudicating Authority's role is to ensure compliance with the Code and Regulations.3. Deduction of Rs. 34 crores from the final payment to the Appellant:The Appellant contended that the Rs. 34 crores paid to the vendors of the Corporate Debtor (CD) should not be treated as recovery and deducted from the final payment. The Tribunal found that the payments made to vendors against the Letter of Credit (LC) during the Corporate Insolvency Resolution Process (CIRP) should be considered CIRP costs and should not be deducted from the Appellant's final payment.4. Inclusion of amounts towards LC payments and Bank Guarantee payments in the total admitted claim of the Appellant:The Appellant sought the inclusion of amounts towards LC payments and Bank Guarantee payments in its total admitted claim. The Tribunal agreed that these amounts should be considered CIRP costs, as they were necessary to keep the CD as a going concern during the CIRP.5. Classification of the Non-Fund Based Facility as financial debt:The Appellant argued that the Non-Fund Based Facility (NFB Facility) falls within the definition of financial debt under Section 5(8)(h) of the IBC. The Tribunal acknowledged that the NFB Facility was necessary for the CD's operations and should be treated as interim finance or CIRP cost.6. Treatment of the amount paid to vendors during CIRP as interim finance or CIRP cost:The Tribunal emphasized that the payment of the amount to vendors during CIRP should be treated as CIRP cost. The Resolution Professional (RP) admitted that the continuation of the NFB Facility was essential for the CD's operations. Therefore, the payments made to vendors should not be deducted from the Appellant's final payment under the Resolution Plan.7. Role and responsibilities of the Resolution Professional and Committee of Creditors:The Tribunal highlighted the duties of the RP under Sections 20 and 25 of the IBC to maintain the CD as a going concern and raise interim finance with CoC's approval. The RP's suggestion to the CoC to either treat the amount as interim finance or deduct it from the Appellant's payment was deemed erroneous. The Tribunal clarified that it was the RP's responsibility to classify the expenses as CIRP costs and obtain CoC's approval for payment.Conclusion:The Tribunal partly allowed the appeal, directing the RP not to deduct Rs. 34 crores from the final payment to the Appellant, as it constituted CIRP costs. The Tribunal emphasized that the payments made to vendors during CIRP were necessary to keep the CD as a going concern and should be treated as CIRP costs.