2022 (3) TMI 114 - AT - Insolvency and Bankruptcy

Appellate Tribunal Quashes Resolution Plan for Irregularities

Dr. Periasamy Palani Gounder (erroneously spelt in the impugned Order as Dr Periyasamy Palani Gounder) Versus Mr Radhakrishnan Dharmarajan, MK Rajagopalan

The Appellate Tribunal set aside the order approving the resolution plan due to various irregularities, including valuation discrepancies, exclusion of ... Approval of Resolution Plan for the revival of the Corporate Debtor - discrimination of Related Party Financial or Operational Creditor - HELD THAT:- In the instant case, the approved plan does not conform to the order of priority provided u/s 53 (1) of the Code. It provides nil value to related party Financial and Operational Creditors. It is pertinent to mention that Hon'ble Supreme Court in Phoenix Arc v Spade Fin Services, [2021 (2) TMI 91 - SUPREME COURT], held that those entities in the CoC, who are related parties, can often negatively affect the insolvency process. It further went on to hold that the objects and purposes of the Code are best served when external creditors drive the CIRP to ensure that related parties of the Corporate Debtor do not sabotage the CoC - It is important to mention that related parties are barred from participating in the COC to avoid sabotaging the COC. Per contra, the claim filed by the related party, based on their admitted claims, would have influenced the CIRP if they had been permitted to participate in the COC. After completion of the CIRP and after approval of the Resolution Plan, if any amount is allotted to related party financial or operational creditors, it would not impact the CIRP. Thus, it is clear that IBC treats related parties as a separate category for specified purposes, excluding from the CoC under Section 21 and disqualifying them from being Resolution Applicants under section 29A. However, the IBC does not treat Related Party as a separate class for any other purpose. Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification. Therefore, the Related Party financial or operational creditor cannot be discriminated against under the Resolution Plan, denying their right to get payments under the Resolution Plan only on being a Related Party. It is also made clear that by getting only payment under the Resolution Plan, related party creditors could in no way sabotage the CIRP. The increase in RP fees with retrospective effect can not be considered as CoC's prudent decision. The possibility of an impact on the decision of RP for the submission of the Resolution Plan before the Adjudicating Authority for approval, even without the approval of CoC, cannot be ruled out. Submission of the Resolution Plan for Approval before the Adjudicating Authority violates the statutory provision of Section 30(2) &(3) of the Code and has vitiated the entire CIRP and made the Resolution Plan Void ab initio - A valuation consisting of mere naked values without a detailed report is not valid. It is a settled proposition that the Valuation exercise is conducted to facilitate the CoC's decision-making process. Therefore, the existence of a valid and accurate valuation report is a sine qua non for the COC to exercise its commercial wisdom. A natural sequitur to those above would be that a detailed valuation report is necessary for the CoC to exercise its commercial wisdom objectively. Regulation 36(2) of CIRP Regulations provides the mandatory condition for publication of ‘Form-G’ on the Corporate Debtor's website and the website designated by the Board for the purpose. Non-publication of notices of Form G is a material irregularity in exercise of the powers by Resolution Professional during the Corporate Insolvency Resolution period. In the instant case, there has been a material irregularity in exercising the powers by Resolution Professional during the Corporate Insolvency Resolution Process - Since the said Trust (Prospective Resolution Applicant) 'Sri Balaji Vidyapeeth' has already been declared as ineligible, the 2nd Respondent (SRA) cannot be permitted to act as its alter ego in implementing the Resolution Plan and attain any financial advantage or gain, which is barred by Section 88 of the Indian Trusts Act. The Resolution Professional made an incorrect statement that the revised Resolution Plan was approved at the 9th COC meeting. The revised Resolution Plan was not approved on 22 January 2021. After 22nd January 2021, based on the COC Resolution Dt.22.1.2021, the Resolution Plan was further modified, and the final Revised Resolution Plan dated 25 January 2021 was never laid before the CoC for approval. Thus the approval of the Resolution Plan by the Adjudicating Authority can not be treated as valid under Sec. 31(1) of the I & B Code, 2016 - However, the IBC does not treat Related Party as a separate class for any other purpose. Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification. Therefore, Related Party Financial or Operational Creditor cannot be discriminated under the Resolution Plan only on being a Related Party. Thus, it is clear that IBC treats related parties as a separate category for specified purposes, excluding from the CoC under Section 21 and disqualifying them from being Resolution Applicants under Section 29A. However, the IBC does not treat Related Party as a separate class for any other purpose. Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification - the Related Party financial or operational creditor cannot be discriminated against under the Resolution Plan, denying their right to get payments under the resolution Plan only on being a Related Party. It is also made clear that by getting only payment under the Resolution Plan, related party creditors could in no way sabotage the CIRP. Thus, the approved Resolution Plan is in contravention of Section 30 (2) of the Insolvency and Bankruptcy Code 2016, which contravenes the provision of law - appeal allowed. Issues Involved:1. Irregularities in Valuation of the Corporate Debtor2. Exclusion of Unsecured Creditors from Decision-Making Process3. Non-Publication of Form-G4. Resolution Applicant’s Ineligibility under Section 29A(e) of the Code5. Non-Approval of Revised Resolution Plan by CoC6. Non-Consideration of Section 12A Application7. Discrimination Against Related Party CreditorsDetailed Analysis:1. Irregularities in Valuation of the Corporate Debtor:The Appellant contended that the valuation process conducted by the IRP and RP was contrary to statutory provisions, impairing the commercial wisdom of the Committee of Creditors (CoC). The two valuers appointed did not physically verify the corporate debtor’s assets, violating Regulation 35(1)(a) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Additionally, the non-core assets were valued by only one valuer, contrary to Regulation 35(1). The valuation report was never circulated to the Appellant or other CoC members, and the process was marred by procedural inadequacies and statutory violations.2. Exclusion of Unsecured Creditors from Decision-Making Process:The Appellant argued that the IRP received claims from unsecured financial creditors but did not proceed to accept or reject these claims, excluding them from the decision-making process. This exclusion was a significant procedural irregularity affecting the CIRP.3. Non-Publication of Form-G:Regulation 36A(2)(iii) mandates the publication of Form-G on the corporate debtor’s and IBBI websites to ensure adequate publicity to prospective resolution applicants. The IRP published Form-G only in a newspaper, violating the regulation and impacting the maximization of asset value.4. Resolution Applicant’s Ineligibility under Section 29A(e) of the Code:The Appellant contended that the Resolution Applicant (R-2) was ineligible under Section 29A(e) due to disqualification under Section 164(2)(b) of the Companies Act, 2013. R-2 was a director of a company that failed to repay deposits, making him ineligible to submit a resolution plan. Additionally, R-2, as the managing trustee of Sri Balaji Vidyapeeth, a trust found ineligible to act as a resolution applicant, violated Section 88 of the Indian Trusts Act, 1882.5. Non-Approval of Revised Resolution Plan by CoC:The revised resolution plan dated 25 January 2021 was never placed before the CoC for approval. The CoC had only approved the plan on 22 January 2021, which was later revised. The final revised plan was directly submitted to the Adjudicating Authority without CoC’s approval, violating Sections 30(2), 30(4), 30(6), and 31 of the Code.6. Non-Consideration of Section 12A Application:The Appellant’s proposal for settlement under Section 12A was not considered by the CoC. Despite submitting a settlement offer backed by Deutsche Bank, the CoC did not convene to discuss the proposal. The Appellant argued that the settlement proposal should have been considered to maximize the value of the corporate debtor as a going concern.7. Discrimination Against Related Party Creditors:The Appellant argued that the resolution plan discriminated against related party creditors by providing no payment to them, contrary to the IBC and Article 14 of the Constitution. The IBC does not permit discriminatory plans, and related parties should not be treated differently for payments under the resolution plan.Conclusion:The Appellate Tribunal found that the approved resolution plan contravened Section 30(2) of the Insolvency and Bankruptcy Code 2016, citing irregularities in valuation, exclusion of unsecured creditors, non-publication of Form-G, ineligibility of the resolution applicant, non-approval of the revised plan by CoC, non-consideration of Section 12A application, and discrimination against related party creditors. The Tribunal set aside the common order approving the resolution plan and directed the Resolution Professional to proceed with the CIRP from the publication stage of Form-G, consider the settlement proposal, and ensure related party creditors are not discriminated against.Order:The appeals were allowed, and the order approving the resolution plan was set aside. The Resolution Professional was directed to reinitiate the CIRP process, consider the settlement proposal under Section 12A, and ensure non-discrimination against related party creditors. The time taken in the appeal was excluded from the CIRP period.