2020 (2) TMI 1751 - Tri - IBC

Resolution plan u/ss30 and 31 IBC approved; promoter disqualified by s.29A(c) can only operate business

NCLT (Hyd) approved the resolution plan for the corporate debtor under ss.30(2), 30(4), 30(6) and 31 of the IBC, holding that all statutory conditions and ... Seeking approval of Resolution Plan of the present Corporate Debtor - requirements of Sections 30(2), 30(4), 30(6) and 31 of the Insolvency and Bankruptcy Code, 2016 satisfied or not - HELD THAT:- Before approving the Resolution plan, it is the duty of the Adjudicating Authority that it should satisfy itself that the Resolution plan as approved by the COC meets the requirements as referred to in sub- section (2) of Section 30 - this Adjudicating Authority finds that the plan submitted by the RP conforms to the conditions laid down in Section 30(2)(a) to (f) of the Code and hence qualifies for approval by this Adjudicating Authority. It is an undisputed fact that at the time of initiation of CIRP in the case of the Corporate Debtor, EIH held 16% equity shares in the Corporate Debtor as a Promoter Shareholder, the balance 84% Equity shares being held by M/s.Core Hotels, the other Promoter of the Corporate Debtor, which was promoted by both as a SPV for construction and management of Hotel Trident on the land allotted by Government of Telangana for the purposes of Tourism Development in the State of Telangana - M/s. EIH Limited is a Company incorporated under the Companies Act, 1956, and is only an artificial juridical person. Being an artificial juridical person, it cannot have separate personalities in view of the fact that it promoted the Corporate Debtor under the Shareholders Agreement with the understanding that it will be given the Operation and Management rights of the proposed Hotel. Again, as regards the claim of EIH Limited that they have independent right under the Management Agreements with the Corporate Debtor, which cannot be infringed by approval of the proposed Resolution Plan, it is observed that the independent right as claimed by EIH is not independent of its shareholding in the Corporate Debtor, as the two Promoters namely EIH Ltd (16%) and Core Hotel (84%) jointly bid for the project, with the understanding that EIH will be the operator of the Hotel business of the Corporate Debtor - Nobody can predict the outcome of the arbitration proceedings which will be available only after the approval of the proposed Resolution Plan and cessation of the Moratorium imposed U/s.14 of the Code. Therefore, it will not be proper for this Adjudicating Authority to decide this issue at this juncture, as the same will be nothing but pre- empting the Final Award in the arbitration proceedings. It is pertinent to note that the EIH being a promoter shareholder having 16% equity of the Corporate Debtor, cannot be treated differently from the other Promoter M/s. Core Hotels having 84% of the equity shareholding in Corporate Debtor. Provisions of Sec.29A(c) clearly debar a Promoter/Shareholder to be a part of the Corporate Insolvency Resolution Process of the Corporate Debtor. Hon'ble Supreme Court in the case of Chitra Sharma & Ors Vs UoI & Ors [2018 (8) TMI 661 - SUPREME COURT] and in Jaypee Infratech case has put an end to the questions raised with respect to the application and scope of Sec.29A. While dealing with the eligibility of Jaiprakash Associate Limited (JAL), the parent company of Jaypee Infratech Limited as a Resolution Applicant under Sec.29A, the Hon'ble Apex Court observed that JAL and other Promoters are disqualified from submitting a Resolution Plan as they fall within the scope of Sec.29A and therefore ineligible. Hon'ble Supreme Court has also described the insertion of Sec.29A as plugging a loophole and has ruled that strict adherence to Sec.29A is mandatory and that wilful defaulters shall not be permitted to participate in the Corporate Insolvency Resolution Process. Keeping in view, the above Ruling of the Apex Court it is clear that EIH, being a promoter of the Corporate Debtor will be ineligible under Sec.29A(c) of the Code and therefore, any direction by this Adjudicating Authority to include EIH as integral part of the Resolution Plan will vitiate the Resolution Plan, EIH being ineligible to participate in the Corporate Insolvency Resolution Process of the Corporate Debtor of which it is indisputably a Promoter - EIH may not be excluded from the consideration zone provided EIH will play its role purely and exclusively as an operator and does not indulge in or interfere with the Management of the affairs of the Corporate Debtor and in any of its decision making process in the course of its business. With regard to the objections raised by Shri L.N Sharma regarding the Resolution Plan, this Adjudicating Authority finds that it is the commercial wisdom of the CoC members in approving the Resolution Plan which is paramount as it is a commercial decision. Though the Code doesn't provide for any such classification as special Operational Creditor, this Adjudicating Authority finds that the instant case is very much peculiar in nature. It is to be noted that the very operation of the Corporate Debtor stands upon the lease agreement between the Corporate Debtor and YATC and Society. It is a matter of fact that already arbitration proceedings have been initiated and is pending adjudication between YATC and the CD for the alleged breach of contract between them. This Adjudicating Authority, therefore, understands the decision of the CoC to pay out the dues of YATC and the Society more so because they are the lessors of the land in which the business of the CD is being carried out - The members of CoC in their wisdom have taken a commercial decision to pay out the dues of YATC and Society being payment to the Government with a motive to sustain the business operations of the Corporate Debtor. This Adjudicating Authority finds that the decision of the CoC in treating YATC and the Society differently makes complete sense from the point of view of the lofty ideals of the Code - The stand of YATC as well as Society that without prior approval from them, the Resolution Plan submitted by the RP cannot be approved is not well founded taking into account the timelines of the Code. By the time, a resolution plan is placed for consideration and gets approved by the CoC, only a brief period may be left for completion of the CIRP. Since the Resolution Plan under consideration provides for payment of claims of YATC and Society in full, in all probabilities, pending arbitration proceedings may be resolved in terms of such payment and since the lease agreements held by YATC and Society with the Corporate Debtor being intact, both YATC and Society may very well consider granting necessary approvals to the Resolution Applicant on being approached. In K Sashidhar Vs. Indian Overseas Bank & Others [2019 (2) TMI 1043 - SUPREME COURT], the Hon'ble Supreme Court, noticing the provisions of section 30(4), held that if the CoC had approved the resolution plan by requisite percent of voting share, then as per section 30(6) of the Code, it is imperative for the resolution professional to submit the same to the adjudicating authority (NCLT). On receipt of such a proposal, the adjudicating authority (NCLT) is required to satisfy itself that the resolution plan as approved by CoC meets the requirements specified in Section 30(2). No more and no less - Hon'ble Supreme Court held that the discretion of the adjudicating authority is circumscribed by Section 31 and is limited to scrutiny of the resolution plan 'as approved' by the requisite percent of voting share of financial creditors. Even in that enquiry, the grounds on which the adjudicating authority can reject the resolution plan is in reference to matters specified in Section 30(2) when the resolution plan does not conform to the stated requirements. The Resolution Plan' filed with the Application meets the requirements of Section 30(2) of the I&B Code, 2016 and Regulations 37, 38, 38(1A) and 39 (4) of IBBI (CIRP) Regulations, 2016. The 'Resolution Plan' is also not in contravention of any of the provisions of Section 29A - the 'Resolution Plan' annexed with Application is hereby approved, which forms part of this Order and which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan - The approved 'Resolution Plan' shall become effective from the date of passing of this Order. Application disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the resolution plan submitted for the corporate debtor satisfied the requirements of Sections 30(2), 30(4), 30(6) and 31 of the Insolvency and Bankruptcy Code, 2016 and corresponding CIRP Regulations, so as to warrant approval. 1.2 Whether the classification and treatment of Government lessors (YATC and Shilparamam/Society) as 'Special Operational Creditors', with 100% payment of admitted claims, while other operational creditors received NIL, was permissible and non-discriminatory under the Code and Regulations. 1.3 Whether prior written consent/approval of the Government of Telangana and Shilparamam/Society was a condition precedent to approval of the resolution plan by the Adjudicating Authority. 1.4 Whether objections of the suspended promoter/director to the resolution plan, including reliance on a higher OTS proposal and alleged infirmities in feasibility, viability, distribution and process (including evaluation matrix, collusion and non-consideration of Section 12A) could be sustained against the commercial wisdom of the CoC. 1.5 Whether the hotel operator and 16% shareholder/promoter (EIH) could insist on continuation as operator and protection of alleged 'independent' contractual rights under the management agreements, and whether such participation would offend Section 29A in the context of the resolution plan. 1.6 Whether the grievances of non-government operational creditors (including MSME contractors) regarding NIL payment, alleged discrimination vis-à-vis YATC/Society, and alleged violation of the 'fair and equitable' requirement and MSMED Act, required rejection or modification of the resolution plan. 1.7 Whether the plan being subject to a 'Condition Precedent' (written consent of YATC and Society) and containing various reliefs/waivers from governmental authorities rendered it non-compliant or incapable of approval, and to what extent such waivers could be granted by the Adjudicating Authority. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Compliance of the resolution plan with Section 30(2), 30(4), 30(6) and 31 and CIRP Regulations Legal framework (as discussed) 2.1.1 The Tribunal examined Section 30(2)(a)-(f), Section 30(4), Section 30(6) and Section 31 of the Code (as amended on 06.08.2019), and Regulation 38 of the CIRP Regulations. It noted the binding interpretation of the Supreme Court in decisions on: (i) the limited scope of judicial review (commercial wisdom of CoC) and (ii) the minimum treatment of operational creditors in light of Section 30(2)(b) read with Section 53. Interpretation and reasoning 2.1.2 The Tribunal recorded that: (a) The plan provides for payment of CIRP costs in priority. (b) The plan was approved by 68.26% of voting share of financial creditors, in compliance with Section 30(4). (c) The resolution applicant's eligibility under Section 29A was verified and supported by affidavit under Section 30(1). (d) Liquidation value was ascertained by two registered valuers under Regulation 27; total financial commitment under the plan (INR 584.02 crores) was higher than average liquidation value (INR 448-458 crores). (e) The plan provides 37% of admitted claims for secured financial creditors, capital infusion of INR 180 crores for capex/working capital, and detailed provisions on management, implementation and supervision (including a Steering Committee and independent O&M contractor). (f) For operational creditors (other than the Special Operational Creditor), the plan provides NIL payment, being the liquidation value under Section 53; the Tribunal noted that, following the statutory amendment to Section 30(2)(b), distribution as per the liquidation waterfall is statutorily deemed 'fair and equitable'. (g) The plan deals with pending arbitration awards by directing distribution of any favourable award amounts to financial creditors and extinguishing adverse liabilities, and sets out a comprehensive implementation schedule. 2.1.3 The Tribunal relied upon: (a) The RP's Form-H compliance certificate affirming conformity with the Code and Regulations, and eligibility of the resolution applicant under Section 29A. (b) The CoC's recorded assessment of feasibility and viability, and its commercial decision as to distribution, in light of the Supreme Court rulings that the Adjudicating Authority cannot sit in appeal over commercial wisdom. Conclusions 2.1.4 The Tribunal held that the resolution plan meets all requirements of Section 30(2)(a)-(f) and Regulations 37, 38, 38(1A), 39(4), does not violate Section 29A, exceeds liquidation value, and thus qualifies for approval under Section 31. 2.1.5 The resolution plan was accordingly approved and made binding on the corporate debtor, its employees, members, creditors, guarantors, and all stakeholders, including Central and State Governments and local authorities, subject to limited directions regarding governmental approvals and waivers (see Issue 2.7). 2.2 Preferential treatment of Government lessors (YATC and Shilparamam/Society) as 'Special Operational Creditors' Interpretation and reasoning 2.2.1 The plan classified YATC and Shilparamam/Society (owners/lessors of the project land) as 'Special Operational Creditors' with admitted claims of approx. INR 41.99 crores to be paid in full, while other operational creditors receive NIL. 2.2.2 The Tribunal noted: (a) The corporate debtor is a special purpose vehicle whose entire hotel project stands on land leased from YATC and Society; lease tenure is limited (33 years, up to 2041); arbitration is pending for alleged breaches. (b) Continuation of the project as a going concern is dependent on subsisting lease and cooperation of these lessors; non-payment would likely result in termination, multiplicity of proceedings, and failure of the resolution plan leading to liquidation. (c) NCLAT has held that landlord-tenant relations do not per se constitute an operational creditor-operational debtor relationship, distinguishing such creditors from typical trade/ services operational creditors. 2.2.3 The Tribunal reasoned that: (a) Though the Code does not expressly recognise a category of 'special operational creditor', creditors similarly situated may not exist in this fact situation; YATC/Society as land-owning lessors are materially distinct from trade/service suppliers. (b) Applying the principle in Binani and Swiss Ribbons, discrimination is impermissible only among 'similarly situated' creditors; differential treatment based on an intelligible differentia rationally connected with resolution objectives is permissible. (c) If YATC/Society were treated strictly at par with other operational creditors and paid NIL, the project would 'come to a standstill', defeating the object of resolution and compelling liquidation with no better outcome for stakeholders. Conclusions 2.2.4 The Tribunal held that treating YATC and Society differently from other operational creditors is justified and consistent with the Code, given their unique position as lessors and critical stakeholders for continued operation. 2.2.5 Objections that such treatment was discriminatory or illegal were rejected. 2.3 Necessity of prior government/lessor consent as condition precedent to NCLT approval Legal framework (as discussed) 2.3.1 The Tribunal considered Section 31(4) (one year window to obtain statutory/government approvals after plan approval) and the plan's own Condition Precedent requiring written consent of YATC and Society for change of control/restructuring within one year, failing which the performance bank guarantee would be returned and obligations cease. Interpretation and reasoning 2.3.2 YATC and Society contended that: (a) As owners of the land under BOT/lease arrangements, their prior written consent was mandatory before approval of the plan; and (b) The plan was defective for not obtaining such consent upfront. 2.3.3 The Tribunal held that: (a) The Code prescribes strict timelines; by the time a plan is voted upon by CoC and presented to NCLT, limited CIRP time remains, making it impractical to insist on full prior governmental approvals as a condition to NCLT approval. (b) Section 31(4) expressly allows the resolution applicant one year from NCLT approval (or such period as specific law may prescribe) to obtain necessary approvals from government or local authorities. (c) Since the plan provides for full payment of YATC/Society's claims, pending arbitrations may be resolved in terms of such payment, and the lease arrangements remain in force; YATC and Society can thereafter consider approvals when approached. (d) The plan's own Condition Precedent mechanism protects the resolution applicant: if consent is not obtained despite reasonable efforts within one year, the performance guarantee is returned and obligations under the plan cease. Conclusions 2.3.4 The Tribunal rejected the contention that prior written consent of YATC/Society was a legal precondition to NCLT's approval of the resolution plan. 2.3.5 The plan was approved subject to the Condition Precedent being fulfilled or waived by the resolution applicant within one year, in line with Section 31(4). 2.4 Objections of the suspended promoter/director, including OTS and alleged infirmities in feasibility, viability and process Legal framework (as discussed) 2.4.1 The Tribunal relied on the Supreme Court's exposition in decisions clarifying: (a) commercial wisdom of CoC in approving a resolution plan is non-justiciable except on Section 30(2)/31 parameters, and (b) NCLT/NCLAT cannot re-evaluate merits, feasibility, viability, or re-distribute value. Interpretation and reasoning 2.4.2 The promoter argued that: (a) An OTS/settlement proposal of approx. INR 430 crores was superior to the plan (which provides lesser absolute payment to financial creditors), and CoC erred in not accepting it. (b) The CoC failed properly to evaluate feasibility and viability; there were alleged collusive acts, violations of evaluation matrix, and inadequate due diligence by the RP. 2.4.3 The Tribunal observed that: (a) Once CIRP is initiated, any settlement is to be routed through Section 12A, requiring 90% CoC voting; the Code does not permit the Adjudicating Authority to compel consideration or acceptance of an OTS outside Section 12A. (b) The financial creditors' lending is contractual; they cannot be compelled to accept the promoter's settlement proposal in preference to a CoC-approved resolution plan. (c) The RP had placed the OTS/Section 12A issue before CoC in meetings; CoC discussed the proposal with legal opinion, but did not exercise the option to withdraw under Section 12A. (d) Allegations of collusion, misuse of evaluation matrix, and failure to consider arbitral claims, etc., all go to commercial assessment and strategy of CoC; absent violation of Section 30(2), NCLT cannot second-guess such decisions. (e) The CoC's approval of the plan by 68.26% votes itself reflects its view on feasibility and viability; as held by the Supreme Court, such collective business decision is non-justiciable. Conclusions 2.4.4 The Tribunal held that it could not direct CoC to prefer or consider the promoter's OTS proposal over the duly approved resolution plan. 2.4.5 All objections by the suspended promoter in IA No. 61/2019, including on OTS, feasibility/viability, alleged discrimination, procedural complaints and collusion, were rejected as unsustainable in view of the binding precedents on the primacy of CoC's commercial wisdom and the plan's conformity with Section 30(2). 2.5 Rights and eligibility of EIH as hotel operator and 16% shareholder/promoter Legal framework (as discussed) 2.5.1 The Tribunal analysed Section 29A, particularly clauses (c) and (j)(ii), and the definition of 'connected person', read with judicial exposition on promoters and control. It also considered ongoing arbitration between the corporate debtor and EIH under the management agreements. Interpretation and reasoning 2.5.2 EIH contended, inter alia, that: (a) It has a 'dual capacity' - (i) 16% shareholder/promoter and (ii) independent hotel operator under management agreements. (b) Its operator rights are third-party contractual rights unaffected by CIRP or any resolution plan. (c) Section 29A does not apply to its role as future operator, and CoC/RP cannot insist on its exclusion or termination of its agreements through the resolution plan. 2.5.3 The Tribunal found: (a) EIH is a promoter shareholder holding 16% equity in the corporate debtor; the project was bid jointly by EIH and the other promoter with a clear understanding that EIH would operate and manage the hotel. (b) Being an artificial juridical person, EIH cannot be bifurcated into separate legal 'personalities' (promoter vs operator); its operator role is structurally and causally linked to its promoter status and shareholding. (c) Under the management agreement, EIH exercised substantial control over the hotel's bank accounts and operations; NCLAT had to intervene to restore control to the RP, reflecting EIH's effective control over the corporate debtor's operations. (d) As a promoter of a corporate debtor whose account is NPA, EIH falls within Section 29A(c) and is ineligible to be 'connected' with a resolution applicant during implementation of the plan. (e) The management agreements have been terminated and rights are sub judice before an arbitral tribunal; an interim status quo award is in force. The Tribunal held it inappropriate and premature to adjudicate EIH's contractual rights while arbitration is pending. 2.5.4 On reliefs sought: (a) EIH's prayers to declare that its operator rights are unaffected by CIRP or that no plan can displace it were rejected, as such directions would (i) conflict with Section 29A, and (ii) pre-empt the arbitral tribunal's final award. (b) The plan's prayer to terminate EIH's agreements was also not adjudicated, given the pending arbitration; the Tribunal declined to decide termination within the Section 31 approval order. (c) However, the Tribunal clarified that if, post-implementation, the resolution applicant, in its commercial discretion, wishes to engage EIH purely as a hotel operator (without management/control or participation in decision-making), nothing in the order would preclude such engagement, provided Section 29A is not offended. Conclusions 2.5.5 EIH, as a promoter shareholder with 16% equity and effective operational control, is ineligible to be part of the resolution process as a connected person under Section 29A; NCLT cannot direct its inclusion as integral to the plan. 2.5.6 EIH's applications seeking protection of operator status and restriction on CoC/RP/RA from altering that status were disposed of with the above observations and without granting the substantive declarations sought. 2.6 Grievances of non-government operational creditors, including MSMEs, regarding NIL payment and alleged discrimination Interpretation and reasoning 2.6.1 Operational creditors (including MSMEs like CEC, Infinity Interiors, and NCC) contended that: (a) They were initially offered a small amount (e.g. INR 5 crores collectively), later reduced to NIL, while YATC/Society were paid in full. (b) This was discriminatory and contrary to Binani, Swiss Ribbons and Essar line of cases; operational creditors should receive 'roughly the same treatment' as financial creditors. (c) MSME creditors invoked MSMED Act provisions and argued for full payment or priority. 2.6.2 The Tribunal, while acknowledging that the Code and Regulations require priority to operational creditors and non-discriminatory treatment among similarly situated creditors, reasoned that: (a) After the statutory amendment to Section 30(2)(b), the minimum payment for operational creditors is what they would receive in liquidation under Section 53 or equivalent; distribution in accordance with that clause 'shall be fair and equitable' by legislative declaration. (b) For the non-government operational creditors, liquidation value under Section 53 is NIL; the plan therefore complies with Section 30(2)(b) in giving NIL. (c) YATC/Society are not 'similarly situated' to other operational creditors due to their role as landowners/lessors on whom the very substratum of the business depends. (d) The CoC's decision to preserve the project by paying YATC/Society is a commercial decision aligned with the objective of resolution; insisting on equal pro-rata payment could jeopardize lease rights and force liquidation. (e) Statutory rights of MSMEs under the MSMED Act cannot override the distribution scheme of the Code in a CIRP approval proceeding; any such claims must be pursued in accordance with the statutory framework, without re-writing a CoC-approved distribution that is Code-compliant. Conclusions 2.6.3 The Tribunal held that allocation of NIL to non-government operational creditors (including MSMEs), while paying YATC/Society in full, is not illegal or discriminatory under the Code, given the statutory framework of Section 30(2)(b), Section 53, and the distinct position of lessor Government agencies. 2.6.4 Applications by NCC, CEC and Infinity Interiors seeking rejection or modification of the plan on these grounds were dismissed. 2.7 Conditionality of the plan, governmental waivers, and scope of NCLT in granting concessions Interpretation and reasoning 2.7.1 The plan contained: (a) a Condition Precedent requiring written consent of YATC/Society within one year; and (b) various prayers for waivers/reliefs from Government of Telangana and tax authorities (including extension of lease tenure and statutory tax waivers). 2.7.2 During the hearing, the RP and resolution applicant stated that certain prayers - including waiver of taxes, blanket waivers from Government of Telangana, and extension of lease term to 2074 - were 'not pressed'. 2.7.3 The Tribunal: (a) Accepted that these non-pressed prayers would not be granted or form part of the approval. (b) Clarified, following precedent, that NCLT's approval of a plan does not constitute or confer any automatic waiver or exemption from statutory obligations; any concessions or waivers under other laws must be obtained from the competent authorities in accordance with those laws. (c) Distinguished the case relied upon regarding municipal property (where creation of security over third-party municipal land without statutory approval was disallowed) on facts; here, lease agreements already exist, and the plan only contemplates seeking necessary approvals within the statutory timeframe, not overriding public law constraints. (d) Emphasised that Section 31(4) governs the timeframe for obtaining any necessary approvals post-plan approval; NCLT cannot substitute itself for statutory or governmental decision-makers. Conclusions 2.7.4 The Tribunal held that the Condition Precedent structure is permissible and consistent with Section 31(4); it does not render the plan non-compliant. 2.7.5 Prayers for universal waivers, tax immunities, or automatic extension of lease were not granted; any such concessions remain subject to independent approval by competent authorities. 2.7.6 The plan stands approved without modification, save that no deemed statutory waivers or extensions flow from the approval order.