2022 (4) TMI 207 - AT - Insolvency and Bankruptcy

Appeal for Substantive Consolidation Denied, Upholding Legal Identities of Companies

The Tribunal dismissed the appeal seeking substantive consolidation of the Corporate Debtor and Respondents Nos. 2-6, upholding the Adjudicating ... Substantive consolidation of corporate insolvency proceedings - substantial consolidation as an exceptional remedy - mere shareholding not constituting group companies - separate dates of default and separate causes of action precluding consolidation - assets and liabilities consolidation limited by statutory scheme of the Code - limited judicial review of the commercial wisdom of the Committee of Creditors under Sections 30 and 31 - finality of liquidation proceedings and impossibility of setting back the liquidation clockSubstantive consolidation of corporate insolvency proceedings - mere shareholding not constituting group companies - separate dates of default and separate causes of action precluding consolidation - finality of liquidation proceedings and impossibility of setting back the liquidation clock - limited judicial review of the commercial wisdom of the Committee of Creditors under Sections 30 and 31 - Whether the Adjudicating Authority was justified in dismissing the liquidator's application for substantive consolidation of the Corporate Debtor with Respondents Nos. 2-6. - HELD THAT: - The Tribunal upheld the Adjudicating Authority's conclusion that consolidation was not maintainable on the facts. The Court recorded that there were distinct admission orders, different identities, different dates of default and separate causes of action for the companies sought to be consolidated; two of the entities (Respondents 2 and 3) were already in liquidation and Respondents 4-6 were solvent companies against whom no default under the Code had been established. The Tribunal accepted the Adjudicating Authority's finding that mere cross shareholding or common directors, without more, does not establish that companies are 'group companies' for the purpose of substantive consolidation, and that the Code does not provide for consolidation merely because entities hold substantial shares in each other. The Bench emphasised that substantial consolidation is an exceptional remedy and cannot be used to unsettle completed liquidation steps or to set back liquidation processes already underway. Further, the Tribunal applied the settled principle that the commercial wisdom of the Committee of Creditors and the limited scope of judicial review under the Code (as expounded in the Supreme Court authorities reproduced in the judgment) restrict the Tribunal's intervention in matters affecting resolution plans and related commercial decisions. Having regard to these factors and the stage of proceedings, the Tribunal found no illegality or infirmity in the Adjudicating Authority's refusal to order consolidation. [Paras 5, 6, 7, 8, 9]The Adjudicating Authority rightly dismissed the application for substantive consolidation; the appeal is dismissed.Final Conclusion: The Tribunal dismissed the appeal, holding that on the admitted facts-distinct CIRP/liquidation orders, different dates of default, lack of pleaded defaults against certain respondents, and the exceptional nature of substantial consolidation-consolidation was not maintainable and there was no interference warranted with the Adjudicating Authority's order. Issues Involved:1. Substantive consolidation of the Corporate Debtor and Respondents Nos. 2-6 into a single proceeding.2. Common control, directors, and cross shareholding among the Respondent companies.3. Common assets and liabilities among the Respondent companies.4. Interdependence and interlacing of finances among the Respondent companies.5. Jurisdiction and commercial wisdom of the Committee of Creditors (CoC) and the Adjudicating Authority.Issue-wise Detailed Analysis:1. Substantive Consolidation:The Appellant sought the consolidation of the Corporate Debtor and Respondents Nos. 2-6 into a single proceeding, arguing that it would be beneficial for the Corporate Insolvency Resolution Process (CIRP). The Adjudicating Authority dismissed this application, stating that the companies are separate entities with distinct causes of action and defaults. The Authority emphasized that the Insolvency and Bankruptcy Code (IBC) does not provide for consolidation of companies merely based on substantial shareholding. The Tribunal upheld this view, noting that consolidation should be an exception rather than the rule and is typically applicable to group companies, which was not the case here.2. Common Control, Directors, and Cross Shareholding:The Appellant argued that the Respondent companies had common directors and significant cross shareholding, which justified consolidation. The Adjudicating Authority found that mere common shareholding and directorship do not constitute grounds for treating the companies as a single entity. The Tribunal agreed, noting that the companies were not group companies and had separate CIRP proceedings initiated based on distinct defaults and causes of action.3. Common Assets and Liabilities:The Appellant presented forensic audit reports indicating related party transactions and shared liabilities among the Respondents. The Adjudicating Authority acknowledged these transactions but concluded that they did not justify consolidation under the IBC. The Tribunal supported this conclusion, emphasizing that the companies' distinct business activities and separate legal identities precluded consolidation.4. Interdependence and Interlacing of Finances:The Appellant highlighted the financial interdependence among the Respondents, including shared loans and guarantees. The Adjudicating Authority dismissed these arguments, stating that financial interdependence alone does not warrant consolidation. The Tribunal concurred, noting that the Respondents' financial arrangements did not meet the criteria for substantive consolidation under the IBC.5. Jurisdiction and Commercial Wisdom of CoC and Adjudicating Authority:The Tribunal reiterated the limited scope of judicial review over the commercial decisions of the CoC, as established by the Supreme Court in cases like 'K Sashidhar v. Indian Overseas Bank' and 'Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited.' The Tribunal emphasized that the Adjudicating Authority and the Appellate Tribunal cannot interfere with the CoC's commercial wisdom unless there is a material irregularity or non-compliance with Section 30(2) of the IBC. The Tribunal found no such irregularity in this case and upheld the Adjudicating Authority's decision to reject the consolidation application.Conclusion:The Tribunal dismissed the appeal, finding no grounds for substantive consolidation of the Corporate Debtor and Respondents Nos. 2-6. It upheld the Adjudicating Authority's decision, emphasizing the distinct legal identities, separate causes of action, and different stages of insolvency proceedings of the Respondent companies. The Tribunal also highlighted the limited jurisdiction of the Adjudicating Authority and the Appellate Tribunal in reviewing the commercial decisions of the CoC. No costs were awarded, and the related I.A. 2146/2021 was disposed of accordingly.