2019 (12) TMI 284 - AT - Insolvency and Bankruptcy

Court Overturns Adjudicating Authority's Conditions on Resolution Plan

JSW Steel Limited Versus Ashok Kumar Gulla & Ors.

The Adjudicating Authority approved the Resolution Plan submitted by the Appellant with conditions related to 'right to receivables', 'carry forward ... Validity of Resolution Plan - Section 30(2) of the ‘I&B Code’ - prayer for direction to the ‘Resolution Applicant’ for immediate implementation of the ‘Resolution Plan’ and to pay the interest - right to receivables - carry forward of losses of Corporate Debtor - subsidiaries, associate companies and joint ventures of the Corporate Debtor. Right to receivables - HELD THAT:- The Adjudicating Authority has directed that any amount recovered by the ‘Corporate Debtor’ due from any third party which has been written off as bad debts or which stands in the books but has not been recovered as on the date Adjudicating Authority approved, before being put to any other use, would be used to pay the balance amount to dissenting ‘Financial Creditors - the Adjudicating Authority has no jurisdiction to impose such conditions with regard to amount as may be recoverable by the ‘Corporate Debtor’ in future - the Appellant rightly suggested that any amount receivable by the Company, being an asset of the Company, shall continue to remain with the Company upon implementation of the ‘Resolution Plan’. After approval of the plan in terms of Section 31 of the ‘I&B Code’, it is binding on all the stakeholders, including the Creditors and no party can claim any right against the ‘Corporate Debtor’ including right to set off. In fact, the ‘Resolution Plan’ makes the debt payable to any stakeholders/ Creditors clear and no stakeholders including the Creditors can claim any dues from the earlier period thereafter. Carry forward losses of the Corporate Debtor - HELD THAT:- In spite of notice to the Income Tax Authority, no reply has been filed and no objection has been raised - taking into consideration the submissions made by the counsel for the Appellant- ‘JSW Steel Limited’ and taking into consideration the provisions of the Income Tax Act, 1961, including Section 79 and the Rules and Regulations framed thereunder, it is held that both the ‘Successful Resolution Applicant’ and the Income Tax Department will be guided by the Income Tax Act, 1961 and the Rules and Regulations framed thereunder. If the ‘Successful Resolution Applicant’ is entitled to ‘carry forward losses’ under Section 79 of the Income Tax Act, it may claim such benefit before the appropriate Authority, who will pass appropriate order in accordance with Section 79 of the Income Tax Act, 1961 and the Rules and Regulations framed thereunder. Subsidiaries, associate companies and joint ventures of the Corporate Debtor - HELD THAT:- If any of them had any privilege or claim or assets to which they are entitled from the ‘Corporate Debtor’ prior to approval of the ‘Resolution Plan’, it is held that such right of privilege, claim or rights over the assets stand extinguished after the approval of the plan under Section 31 - However, if the ‘Corporate Debtor’ has any right over the ‘subsidiaries’ or ‘associate companies’ or ‘joint ventures’ of the ‘Corporate Debtor’, once the ‘Successful Resolution Applicant’ takes over the ‘Corporate Debtor’, it is for the ‘Corporate Debtor’ to decide whether they will continue with such right over the ‘subsidiaries’ or ‘associate companies’ or ‘joint ventures’ and others. For such right, the Adjudicating Authority is not required to make any such suggestion nor can lay down any condition. The part of the impugned order dated 19th December, 2018 so far as it relates to laying down conditions by the Adjudicating Authority is concerned, are set aside and deleted - rest part of the impugned order dated 19th December, 2018 as clarified vide order dated 16th April, 2019 approving the ‘Resolution Plan’ in favour of the Appellant is confirmed - appeal allowed in part. Issues involved:1. Approval of the Resolution Plan by the Adjudicating Authority with conditions related to 'right to receivables', 'carry forward losses', and 'subsidiaries, associate companies, and joint ventures of the Company'.2. Challenge by the Appellant regarding the authority of the Adjudicating Authority to impose conditions post-approval by the Committee of Creditors.3. Interpretation of Section 79 of the Income Tax Act, 1961 concerning 'carry forward and set off of losses in case of certain companies'.4. Determination of the rights of 'subsidiaries, associate companies, and joint ventures' of the Corporate Debtor post-approval of the Resolution Plan.Detailed Analysis:1. The Adjudicating Authority approved the Resolution Plan submitted by the Appellant, a Successful Resolution Applicant, with conditions related to 'right to receivables', 'carry forward losses', and 'subsidiaries, associate companies, and joint ventures of the Company'. The Appellant challenged these conditions, arguing that the Adjudicating Authority lacked the power to impose them post-approval by the Committee of Creditors.2. The Appellant contended that since the Resolution Plan was compliant with Section 30(2) of the Insolvency and Bankruptcy Code and had received 100% voting shares approval from the Committee of Creditors without objections, the Adjudicating Authority overstepped its jurisdiction by adding conditions. The Committee of Creditors sought immediate implementation of the Resolution Plan and payment of interest at the IDBI Bank's one year MCLR rate to the Creditors.3. The interpretation of Section 79 of the Income Tax Act, 1961 was crucial in determining the 'carry forward losses' of the Corporate Debtor. Despite no objections or replies from the Income Tax Authority, the Appellant and the Income Tax Department were directed to abide by the Act's provisions. The Appellant could claim 'carry forward losses' entitlement before the appropriate Authority as per the Income Tax Act.4. Regarding the rights of 'subsidiaries, associate companies, and joint ventures' of the Corporate Debtor, it was established that any pre-existing privileges or claims would stand extinguished post-approval of the Resolution Plan under Section 31. The Adjudicating Authority was not mandated to suggest or impose conditions concerning these rights, leaving the decision to the Corporate Debtor.5. The judgment referenced the case of 'Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta & Ors', where the Supreme Court emphasized that all claims must be submitted and decided before the Resolution Plan's acceptance to avoid uncertainty for the successful resolution applicant. The judgment concluded by setting aside the conditions imposed by the Adjudicating Authority and confirming the approval of the Resolution Plan in favor of the Appellant.