2022 (3) TMI 1656 - AT - IBC

Appeal dismissed: Resolution Plan met Section 30(2) IBC; no material irregularity and appellant lacked standing with under 10% claims

NCLAT dismissed the appeal, holding the Resolution Plan approval satisfied Section 30(2) of the IBC and finding no material irregularity in the RP's ... Seeking approval of the Resolution Plan - the equirement as referred to in Section 30(2) of IBC satisfied or not - material irregularity in exercise of the powers by the RP - debts owed to Operational Creditors of the ‘Corporate Debtor’ have not been provided for in the Resolution Plan - HELD THAT:- This Tribunal is of the considered view that there are no substantial grounds to appoint a third valuer and there are no irregularity either in the conduct of the RP or in the commercial wisdom regarding distribution of the proceeds of the Resolution Plan. Subsection (c) of Section 24 provides for the representation of ‘Operational Creditors or their representatives if the amount of their aggregate dues is not less than 10% of the debt’. In the instant case, as the ‘Claim’ of the Appellant is lesser than 10% of total admitted claims of the ‘‘Corporate Debtor’’, it is opined that the Appellant is not entitled to be present in the meeting of the CoC and would therefore come to know of the Insolvency Process of the ‘Corporate Debtor’ only subsequent to the publication of the ‘Notice’ by the Resolution Professional seeking submission of ‘Claim’. In a catena of Judgments, the Hon’ble Supreme Court has laid down that the commercial wisdom of the CoC is non-justiciable unless it does not comply with the provisions of Section 30(2) of the Code. The Hon’ble Supreme Court in K Sashidhar Vs. Indian Overseas Bank & Ors. [2019 (2) TMI 1043 - SUPREME COURT] has observed that 'Significantly, the matters or grounds— be it under Section 30(2) or under Section 61(3) of the I&B Code —are regarding testing the validity of the “approved” resolution plan by CoC; and not for approving the resolution plan which has been disapproved or deemed to have been rejected by CoC in exercise of its business decision.”' This Tribunal is of the considered view that there are no substantial grounds to set the clock back especially in the light of the fact that a Resolution Plan has been implemented two years ago and the change in the management of the ‘‘Corporate Debtor’’ has also been effectuated - Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Adjudicating Authority was justified in approving the Resolution Plan under Section 31 of the Code in the face of challenges under Section 61(3) alleging (a) contravention of law, (b) material irregularity by the Resolution Professional (RP), and (c) failure to provide for debts owed to Operational Creditors in the prescribed manner. 2. Whether non-disclosure (to CoC/IRP/RP) of a Power Purchase Agreement (PPA) and related regulatory orders prior to approval of the Resolution Plan amounted to material irregularity or contravention of law that vitiates approval. 3. Whether classification of persons/suppliers who supplied manpower or services under commercial contracts as Operational Creditors (and not as employees/workmen of the corporate debtor) is legally erroneous such that the Resolution Plan is discriminatory or unlawful. 4. Whether the RP/CoC's valuation process (two valuers with divergent values and no third valuer) or the choice/appointment of valuers and valuers' reported values gives rise to material irregularity or a failure to maximize value under the Code requiring interference. 5. Whether claimants with aggregate dues below the statutory 10% threshold were entitled to participate in CoC meetings and whether non-participation or alleged lack of notice to such claimants amounts to material irregularity. 6. Whether the eligibility/qualification of the successful Resolution Applicants to operate the corporate debtor (in particular expertise in the power sector) is a justiciable ground for setting aside approval of the Resolution Plan. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of Approval of Resolution Plan under Section 31 vis-à-vis Section 61(3) grounds Legal framework: Section 31(1) requires the Adjudicating Authority to be satisfied that the requirements of Section 30(2) have been complied with; Section 61(3) limits appellate interference to specified grounds including contravention of law, material irregularity by the RP, and inadequate provision for debts owed to Operational Creditors as prescribed. Precedent treatment: The Tribunal relies on and follows binding precedents establishing that the commercial wisdom of the Committee of Creditors (CoC) is largely non-justiciable and subject to limited judicial review only under the statutory grounds (e.g., K. Sashidhar; Essar Steel; Ghanashyam Mishra). Interpretation and reasoning: The Court examined the challenged contentions against the statutory list of justiciable grounds. It found that (a) the Resolution Plan was approved by CoC with requisite majority and by the Adjudicating Authority; (b) the Appellants failed to demonstrate that any of the statutory grounds under Section 61(3) were made out; and (c) where distributions involved significant haircuts for Financial Creditors and proportionate treatment of Operational Creditors, the CoC's commercial decision was not shown to contravene Section 30(2). Ratio vs. Obiter: Ratio - commercial wisdom of CoC not open to judicial review except within the narrow statutory grounds; approval will not be set aside without establishing a ground under Section 61(3). Obiter - observations on equities of particular distributions where no statutory violation is shown. Conclusions: Approval of the Resolution Plan was lawful; no interference warranted on the ground that CoC's commercial wisdom or distribution was per se improper absent statutory breach. Issue 2 - Non-disclosure of PPA and related regulatory orders: material irregularity / contravention of law Legal framework: Section 30(2) requires that a plan comply with law and deal with interests of stakeholders; Sections 17, 18, 20 & 25 (as pressed) relate to duties of suspended management and actions during CIRP; Section 61(3) permits appeal where the approved plan contravenes law or there has been material irregularity by the RP. Precedent treatment: Tribunal applies the principle that timing and existence of assets/information relevant to maximization must be assessed against the material available to CoC/RP at approval; subsequent events post-approval generally do not vitiate earlier approval unless concealment/misrepresentation at the time is proved. Interpretation and reasoning: The Tribunal accepted that the PPA and MERC orders relied upon by appellants were executed/issued after the Adjudicating Authority's approval date. The appellants did not show that the PPA existed or was deliberately withheld prior to approval. The Information Memorandum was supplied to CoC and no objection to its adequacy was raised. Thus, the non-disclosure contention did not establish material irregularity under Section 61(3)(ii) or contravention of law. Ratio vs. Obiter: Ratio - post-approval contracts or regulatory orders cannot be used to impeach an approval unless the asset or fact was extant and deliberately concealed at the time of approval; proof of material non-disclosure at the relevant time is necessary to constitute material irregularity. Obiter - comments on alleged loss calculations tied to events after approval. Conclusions: Non-disclosure argument fails; no material irregularity or contravention of law established by facts on record. Issue 3 - Classification: contractual manpower/suppliers as Operational Creditors versus employees/workmen; discrimination claim Legal framework: The Code distinguishes between unsecured operational creditors and employees/workmen; Section 24(c) governs participation rights in CoC meetings for operational creditors whose aggregate dues are at least 10%. Precedent treatment: Tribunal follows statutory definitions and relevant labour jurisprudence (definition of 'workman' per Industrial Disputes Act) and prior authority holding that contractual suppliers of manpower are not necessarily employees of the corporate debtor. Interpretation and reasoning: Contracts between the corporate debtor and appellants evidenced commercial supply of manpower/services on invoice/payment terms; the record established a contractual relationship (single-point supply, monthly invoicing) rather than an employer-employee relationship with the corporate debtor. Consequently, parity with in-house employees/workmen could not be claimed. The Resolution Plan's treatment of such Operational Creditors as a class and the proportional payouts were consistent with the statutory scheme and valuers' assessments. Ratio vs. Obiter: Ratio - parties supplying manpower under commercial contracts are operational creditors, not employees/workmen of the corporate debtor, and therefore not entitled to parity with the debtor's employees absent contractual/employment facts to the contrary. Obiter - notes on contractual clauses analysed. Conclusions: Classification by RP/CoC was proper; discrimination claim not established as violating statutory requirements. Issue 4 - Valuation process and need for third valuer; maximization of value Legal framework: CIRP Regulations provide for appointment of valuers under Regulation 27 and valuation roles in the CIRP; Code's object includes maximization of value. Precedent treatment: The Tribunal applies the standard that differences in valuer estimates do not automatically mandate a third valuer unless there are substantial grounds showing bias, impropriety or failure to maximize value. Interpretation and reasoning: Two independent valuers were appointed and their liquidation and fair values were recorded; though divergent, the CoC by large majority approved appointment and proceeded. Appellants failed to demonstrate substantive misconduct or that appointing a third valuer would have changed the commercial decision. No irregularity in RP conduct in this regard was shown. Ratio vs. Obiter: Ratio - divergence between valuers' figures does not per se constitute material irregularity requiring appointment of a third valuer; CoC's acceptance of valuation process stands unless statutory non-compliance or mala fides is shown. Obiter - quantitative differences noted but not dispositive. Conclusions: No material irregularity in valuation process; no basis to set aside approval on this ground. Issue 5 - Participation/notice rights of Operational Creditors below 10% threshold and alleged lack of notice Legal framework: Section 24(3)(c) grants right to attend CoC meetings to operational creditors only if their aggregate dues are not less than 10% of the debt; RP's duty to publish notice and invite claims is statutory. Precedent treatment: Tribunal follows statutory threshold and prior authority that creditors below 10% share are not entitled to attend CoC meetings and will typically learn of CIRP upon RP's claim notice. Interpretation and reasoning: Appellants' admitted claims were below the 10% threshold; the record showed the Information Memorandum was provided to CoC and statutory publication for claim submission occurred. Appellants' non-attendance or delayed knowledge therefore did not amount to material irregularity or denial of statutory rights. Ratio vs. Obiter: Ratio - absence from CoC meetings by operational creditors whose claims are below 10% does not invalidate CoC proceedings or constitute material irregularity where statutory notice/claim processes have been followed. Obiter - emphasis on statutory design of limited operational creditor participation. Conclusions: No procedural infirmity; appellants were not entitled to CoC participation and lack of prior notice does not vitiate approval. Issue 6 - Eligibility/experience of Resolution Applicants to run the power plant as ground to set aside approval Legal framework: Section 29A prescribes ineligibility criteria; evaluation of financial and technical capability is within CoC's commercial domain; Adjudicating Authority must be satisfied plan meets Section 30(2) requirements. Precedent treatment: Tribunal reiterates that assessment of a resolution applicant's commercial suitability is primarily a CoC decision and not ordinarily subject to re-appraisal unless statutory disqualification (Section 29A) or contravention of law is shown. Interpretation and reasoning: Eligibility assessments were conducted (by Kroll Associates) and CoC approved the Resolution Applicants by requisite majority; appellants did not demonstrate statutory disqualification or that RP failed to follow prescribed processes in determining eligibility. The Tribunal found no justiciable basis to interfere with commercial evaluation of suitability or competence. Ratio vs. Obiter: Ratio - alleged lack of sectoral experience of successful applicants is not a ground to set aside a plan absent statutory ineligibility or material irregularity in the eligibility assessment. Obiter - notes on financial pledges and consortium background considered by CoC. Conclusions: No merit in challenging approval on the ground of alleged lack of requisite experience/qualification of Resolution Applicants. Overall conclusion The Tribunal dismissed the appeals: the appellants failed to establish any of the limited statutory grounds under Section 61(3) (contravention of law, material irregularity by RP, or failure to provide for operational creditors in the prescribed manner). The CoC's commercial wisdom, valuation process, classification of contractual service providers, and eligibility assessments of Resolution Applicants were held to be within the permissible scope of commercial decision-making and not amenable to interference on the facts.