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 the Corporate Debtor into a single proceedings solely for the purpose of CIRP in accordance with the provisions of the Code - Consolidation of all assets and liabilities of the Corporate Debtor - whether the Adjudicating Authority was justified in rejecting the substantial consolidation prayed for? - HELD THAT:- Unless there is any material irregularity or that the Resolution Plan does not meet the essential requisites under Section 30(2) of the Code, the Learned Adjudicating Authority has very limited jurisdiction regarding the approval of the ‘Resolution Plan’. When R-2 & R-3 are already under Liquidation, the question of consolidation, when Adjudicating Authority has such limited jurisdiction is not executable. In the instant case, the Resolution Plan has not yet been approved on account of the Order of this Tribunal directing the Adjudicating Authority not to pass any Order with respect to approval/rejection of the Resolution Plan. Respondents 4 to 6 cannot be brought under the Resolution Process of the Code for the simple reason that there is no material on record to establish any default being committed by the said Respondents under the Code - the second Respondent is already undergoing Liquidation Process since the last two years and this Tribunal is of the earnest view that the clock cannot be set back at this stage. Mere common shareholding does not give any substantial grounds to the Appellant herein to seek substantive consolidation based on the facts and circumstances of the attendant case on hand. Having regard to the fact that all the Respondent Companies are in different stages of CIRP/Liquidation under the Code having different ‘dates of default’, separate causes of action, and unrelated business activities, this Tribunal is of the earnest view that the Adjudicating Authority has rightly passed the Impugned Order - Appeal dismissed. 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.