CoC's rejection of Section 12A withdrawal proposal offering 100% debt repayment deemed arbitrary and unsustainable

NCLAT held that CoC's rejection of Section 12A withdrawal proposal was arbitrary and unsustainable. Corporate debtor's shareholders offered to provide funds to repay 100% of debts to all creditors. Despite CoC initially expressing willingness to accept upon full deposit and granting time, they dissented within three days of the meeting. When entire amount was subsequently deposited pursuant to tribunal order, the major creditor refused acceptance, demonstrating malafide intent. NCLAT distinguished Section 12A from Section 29A, noting promoter ineligibility doesn't apply to withdrawal proposals. The decision to reject a proposal offering full debt repayment was deemed arbitrary. Appeal allowed.

---

---

Issues Involved:
1. Admission of Section 7 application by the Adjudicating Authority.
2. Substitution of JM Financial Asset Reconstruction Company Ltd. in place of Yes Bank.
3. Rejection of impleadment application by Asian Hotels (East) Ltd.
4. Consideration and rejection of Section 12A proposal by the Committee of Creditors (CoC).

Summary:

Issue 1: Admission of Section 7 application by the Adjudicating Authority
The Suspended Directors and shareholders of the Corporate Debtor challenged the order dated 16.09.2022 by the Adjudicating Authority (NCLT), New Delhi Bench IV, admitting the Section 7 application filed by the Financial Creditor. The Corporate Debtor had defaulted on its financial obligations due to the COVID-19 pandemic, leading to the filing of the Section 7 application by Yes Bank, claiming a default amount of Rs.264,07,35,129/- as on 13.08.2021. The Tribunal upheld the admission of the application, noting that the Corporate Debtor had committed defaults and the application was not an abuse of process.

Issue 2: Substitution of JM Financial Asset Reconstruction Company Ltd. in place of Yes Bank
The order dated 16.09.2022 also permitted JM Financial Asset Reconstruction Company Ltd. to be substituted in place of Yes Bank, the original Financial Creditor. The substitution was challenged but upheld by the Tribunal, noting that the substitution was in accordance with the law and the debt assignment was valid.

Issue 3: Rejection of impleadment application by Asian Hotels (East) Ltd.
Asian Hotels (East) Ltd. and shareholders of the Corporate Debtor challenged the order dated 05.08.2022, which rejected their impleadment application in the Section 7 proceedings. The Tribunal found no merit in the challenge, upholding the rejection of the impleadment application.

Issue 4: Consideration and rejection of Section 12A proposal by the CoC
The Suspended Directors and shareholders submitted a proposal under Section 12A to withdraw the Section 7 application by offering to pay the entire dues of all creditors without any haircut. The CoC initially indicated willingness to consider the proposal if the entire amount was deposited upfront. However, despite the Appellants depositing the entire amount, the CoC rejected the proposal, leading to the Tribunal's intervention.

The Tribunal found the CoC's decision to reject the Section 12A proposal arbitrary and unsustainable. It noted that the proposal offered to pay 100% of the dues to all creditors, including Financial Creditors, Operational Creditors, Employees, Workmen, and Government dues. The Tribunal directed the closure of the CIRP, set aside the order admitting the Section 7 application, and ordered the remittance of the deposited amount to the Resolution Professional for distribution to the creditors. The Tribunal emphasized that the CoC's refusal to accept the proposal was not in good faith and aimed at a hostile takeover of the Corporate Debtor's assets.

Conclusion:
The Tribunal allowed the appeals, accepting the Section 12A proposal, closing the CIRP, and setting aside the order admitting the Section 7 application. The amount deposited by the Appellants was directed to be distributed to the creditors, ensuring the liquidation of the Corporate Debtor's debt.

---