2025 (6) TMI 22 - AT - IBC

Resolution plan set aside due to Interim Resolution Professional's material irregularities and procedural violations

Mr. Amit Sangal Proprietor of M/s. Nitin Plastic Versus Mr. Kairav Anil Trivedi, Canara Bank Ltd. Member of Committee of Creditors of M/s. Prince MFG Industries Private Limited And Mr. Amit Sangal Proprietor of M/s. Nitin Plastic Versus Mr. Kairav Anil Trivedi M/s Prince MFG Industries Private Limited, Committee of Creditors (CoC) Which comprises of : (a) Canara Bank (b) Axis Bank (c) ICICI Bank And Mr. Amit Sangal Proprietor of M/s. Nitin Plastic Versus Mr. Kairav Anil Trivedi

NCLAT Principal Bench set aside the approved resolution plan due to material irregularities by the Interim Resolution Professional. The tribunal found ... Approval of Resolution Plan - No locus standi to raise objections in the ongoing CIRP - Whether, Mr. Kairav Anil Trivedi appointed as Interim Resolution Professional by the Adjudicating Authority vide CIRP order dated 05.10.2021 was lawfully appointed as Resolution Professional by the CoC in accordance with the Regulations or not? - Whether the CoC dissented the appointment of Mr. Kairav Anil Trivedi working as Interim Resolution Professional of the Corporate Debtor being appointed as Resolution Professional of the Corporate Debtor or approved his appointment as Resolution Professional in the First CoC Meeting? - Whether conduct of Mr. Kairav Anil Trivedi the Interim Resolution Professional of Corporate Debtor has been fair, reasonable and in accordance with the provisions of the Code and Regulations or acted in arbitrary and pre-judicial manner as alleged by the Appellant? - HELD THAT:- The IBBI who is the regulator for Resolution Professionals as per the Code, has categorically held Respondent No. 1 as guilty in the present case and debarred the Respondent No. 1 for six months. It is also a fact that the Respondent No. 1 filed a Writ Petition and obtained ad-interim relief from the Hon’ble High Court of Bombay. However, it is consciously noted that the Hon’ble High Court of Bombay gave interim relief to the Respondent No. 1 only on one limited technical ground that whether Mr. Ravi Mittal who signed final disciplinary order acted as whole time member (WTM) or chairman of IBBI. In fact, the Hon’ble High Court of Bombay did not comment on any aspect of merit based on IBBI finding, holding Respondent No. 1 to be involved in misconduct in the present case. It is found that one of ground in the present appeal is violation of CIRP Regulations No. 28 i.e., transferring assets of the Corporate Debtor during CIRP without consent of CoC by signing MoU with SIPL, again alleged to be a related party of Corporate Debtor. In the quoted case of Parental Drug which is an independent case in relation to the present appeal, the Respondent No. 1 has been found guilty of violation of Regulation as well as Section 28(1)(h) (for obtaining prior approval of CoC in certain cases) and IBBI, the regulator has debarred the Respondent No. 1/ Mr. Kairav Anil Trivedi for a period of two years. Thus, based on wholistic reading of several cases instituted against the Respondent No. 1/ Mr. Kairav Anil Trivedi, there are merit in the arguments of the Appellant and find Respondent No. 1 involved in misconduct which has also been investigated and confirmed by IBBI. What has been stand of CoC on CIRP Process? - HELD THAT:- The CoC is trying to justify that the Right2Vote document was erroneously created which caused confusion. It is found that the additional affidavit dated 28.03.2022 filed by Canara Bank in support of IA 247 of 2022 before the Adjudicating Authority, where the CoC made several allegations against the Respondent No.1 are quite contrary to new affidavit dated 29.07.2024 - The CoC has now tried to justify their action in their affidavit dated 29.07.2024 merely on the ground that the right to vote document was erroneously created and is the cause of all fall outs. It is found that the new affidavit dated 29.07.2024 filed by the CoC before us as convincing and we rather find it in complete contrast with the factual position presented before the Adjudicating Authority, in additional affidavit dated 28.03.2022 in IA No. 247 of 2022, hence it is unable to accept the reasoning given by the CoC in the present affidavit dated 29.07.2024. The bank management may like to review whole process involved to safeguard public money of hundreds of crores of rupees. Whether the MoU signed with the SIPL was in accordance with provision of the Code and the Regulations or otherwise. Whether Mr. Kairav Anil Trivedi violated any of the laid down provisions in approving and signing the said MoU? - HELD THAT:- The CoC is vested with the authority to oversee the work of Interim Resolution Professional / Resolution Professional and need to specifically approve actions that could impact the Corporate Debtor's financial health requiring the CoC's prior approval like the transfer of rights or financial or operational debts under material contracts, except when carried out in the ordinary course of business. This provision ensures that the Interim Resolution Professional /Resolution Professional cannot make significant changes to the Corporate Debtor's financial or contractual arrangements without the informed decision and approval of CoC - the Respondent No. 1 signed the said MoU with SIPL in violation of the provisions of the Code and the CIRP Regulations. Whether the contractor of Haridwar plant of the Corporate Debtor i.e., SIPL was related party of the Corporate Debtor? - Whether Mr. Kairav Anil Trivedi brought out misleading facts before CoC? - HELD THAT:- The Respondent No. 1 signed MoU with SIPL violating provision of the Code and Regulations - the SIPL was related party of the Corporate Debtor and Respondent No. 1 gave misleading facts to the CoC in 2nd CoC meeting. Whether, material irregularities, if any, by Interim Resolution Professional /Resolution Professional while taking approval from the Adjudicating Authority will affect the fate of approved Resolution Plan? - HELD THAT:- If a material irregularity is established, the Adjudicating Authority is empowered under the Code to take corrective measures. Such measures may include setting aside decisions taken during the CIRP, directing an investigation into the conduct of the resolution professional, or imposing sanctions on the parties involved. We are conscious that the Adjudicating Authority has limited scope for rejecting a Resolution Plan under Section 31 of the Code and cannot unnecessarily interfere with the “commercial wisdom of CoC”. However, it may not mean that the Adjudicating Authority cannot look into any relevant aspect before approving the Resolution Plan proposed by the CoC. The Adjudicating Authority can reject a plan, if it does not meet the requirement of the Code or Regulations or it violate the Code or Regulations. The Resolution Plan has to be in compliance with Section 30 of the Code. The Hon’ble Supreme Court of India, time and again has stipulated that the commercial wisdom of the CoC is supreme and cannot be interfered as held in catena of judgements including, K. Shashidhar Vs. Indian Overseas Bank & Ors. and Committee of Creditors of Essar Steel India Ltd. Vs. Satish Kumar Gupta [2019 (11) TMI 731 - SUPREME COURT]. While the Adjudicating Authority cannot interfere with the CoC’s commercial decisions, it needs to ensure that the procedure followed by the CoC and/or Resolution Professional is in accordance with the Code and Regulations. Any significant procedural lapses may be a ground for rejection. The Hon’ble Supreme Court of India has emphasised regarding indispensability of procedural safeguards as an integral component of a just, legal ordered must be given its due weight, especially as procedural requirements are not mere formalities to be circumvented for expediency but substantive protections designed to ensure fairness and transparency. Conclusion - i) There was no formal and proper appointment of Mr. Kairav Anil Trivedi as Resolution Professional of the Corporate Debtor by the CoC. ii) The CoC did not approve the Respondent No. 1/ Mr. Kairav Anil Trivedi as the Resolution Professional in 1st CoC meeting. Appeal disposed off. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in these appeals are:(I) (A) Whether the Interim Resolution Professional (IRP) appointed by the Adjudicating Authority was lawfully appointed as the Resolution Professional (RP) by the Committee of Creditors (CoC) in accordance with the Insolvency and Bankruptcy Code, 2016 (the Code) and applicable regulations.(I) (B) Whether the CoC dissented or approved the appointment of the IRP as RP during the first CoC meeting.(I) (C) Whether the conduct of the IRP/RP was fair, reasonable, and in accordance with the Code and CIRP Regulations or whether it was arbitrary, prejudicial, and violative of the Code.(I) (D) What was the stand of the CoC on the CIRP process and the appointment or replacement of the RP.(II) (A) Whether the Memorandum of Understanding (MoU) executed by the IRP/RP with a third party (SIPL) was in accordance with the Code and CIRP Regulations, or whether it constituted a violation.(II) (B) Whether the contractor SIPL was a related party of the Corporate Debtor and whether the IRP/RP misled the CoC regarding this fact.(III) Whether material irregularities committed by the IRP/RP during the CIRP process affect the validity of the approved Resolution Plan.Additionally, the Tribunal considered the issues raised in a Contempt Petition related to the conduct of the IRP/RP and the implementation of the Resolution Plan during pendency of appeals.2. ISSUE-WISE DETAILED ANALYSISIssue (I)(A), (I)(B), and (I)(C): Appointment and Conduct of the Interim Resolution Professional / Resolution ProfessionalLegal Framework and Precedents: The appointment of the IRP by the Adjudicating Authority under Section 9 and confirmation as RP by the CoC under Section 22 of the Code and the CIRP Regulations governs the process. The CoC's commercial wisdom is generally respected, but procedural compliance is mandatory. Prior judgments emphasize the need for proper appointment and adherence to statutory procedures.Court's Interpretation and Reasoning: The Tribunal examined the minutes of the first CoC meeting held on 10.11.2021 and the voting results communicated by the online voting platform, which showed dissent against the confirmation of the IRP as RP. The CoC subsequently proposed replacement of the IRP with a new RP, approved by 100% voting. The CoC's additional affidavit dated 28.03.2022 detailed multiple violations and misconduct by the IRP, including misrepresentation, failure to conduct meetings timely, and unauthorized actions.The Tribunal noted that the IRP was never formally confirmed or appointed as RP by the CoC. The IRP's conduct was found prima facie violative of several CIRP regulations and the Code. The Insolvency and Bankruptcy Board of India (IBBI) conducted an investigation on the Appellant's complaint and suspended the IRP for six months for misconduct, including misrepresentation and concealment of material facts.The IRP filed a writ petition challenging the IBBI order, but the High Court of Bombay's interim relief was limited to a technical issue regarding the authority of the IBBI official passing the order and did not address merits. The Supreme Court dismissed the IRP's appeal against this Tribunal's earlier judgment confirming non-appointment as RP.Key Evidence and Findings: The e-voting results, CoC affidavits, IBBI disciplinary orders, and prior judicial findings established that the IRP was not lawfully appointed as RP and engaged in misconduct.Application of Law to Facts: The Tribunal held that the IRP's appointment as RP was never confirmed by the CoC, and the IRP acted in violation of the Code and CIRP Regulations. The misconduct was material and affected the integrity of the CIRP.Treatment of Competing Arguments: The IRP contended that the Appellant lacked locus standi and misused the CIRP process. The CoC later withdrew the application for replacement of the IRP, stating the IRP acted in best interests. The Tribunal found the CoC's later affidavit inconsistent with its earlier detailed allegations and rejected the justification offered.Conclusion: The IRP was never lawfully appointed as RP by the CoC, and his conduct was found to be fraudulent, arbitrary, and violative of the Code and CIRP Regulations. The IBBI's suspension order was upheld as justified.Issue (II)(A) and (II)(B): Validity of the MoU with SIPL and Related Party StatusLegal Framework: Section 28 of the Code requires prior approval of the CoC for certain actions by the IRP/RP, including transfer of rights or financial debts under material contracts not in the ordinary course of business. CIRP Regulations mandate transparency and prior consent for such actions. Related party transactions require scrutiny to prevent collusion or fraud.Court's Interpretation and Reasoning: The Tribunal observed that the IRP executed a MoU on 10.11.2021 with SIPL for contract manufacturing, with retrospective effect from the date of CIRP initiation (05.10.2021). This MoU was presented as a draft to CoC only on 30.12.2021, indicating misrepresentation. The IRP represented himself as RP in the MoU, which was factually incorrect.Evidence showed that SIPL was a related party of the Corporate Debtor, sharing the same principal place of business and GST registration address, indicating collusion with the Suspended Board of Directors (SBOD). The CoC had earlier alleged the MoU was executed without authority and with wrongful intentions.The IBBI found the IRP guilty of violating Section 28(1)(k) and other provisions by executing the MoU without CoC approval, suppressing facts from the CoC, and acting beyond his authority.Application of Law to Facts: The execution of the MoU without CoC approval violated the Code and CIRP Regulations. The related party status of SIPL and misrepresentation to the CoC further vitiated the transaction.Treatment of Competing Arguments: The IRP and CoC later justified the MoU as beneficial and approved by CoC, but the Tribunal found this inconsistent with earlier affidavits and evidence.Conclusion: The MoU was executed in violation of statutory provisions and CIRP regulations, and SIPL was a related party. The IRP misled the CoC and acted beyond his powers.Issue (III): Effect of Material Irregularities on the Approved Resolution PlanLegal Framework: Section 61(3)(ii) of the Code allows appeals against approval of Resolution Plans on grounds of material irregularities by the RP during CIRP. Material irregularity is a significant deviation from established rules or procedures affecting the fairness or legality of the process. The Supreme Court has emphasized the primacy of CoC's commercial wisdom but also mandated procedural compliance and transparency.Court's Interpretation and Reasoning: The Tribunal defined material irregularity as a substantial procedural or substantive defect affecting the merits or fairness of the CIRP. The IRP's misconduct, including misrepresentation, concealment, unauthorized asset transfer, and violation of CIRP Regulations, constituted material irregularities.The Tribunal noted that the Resolution Plan was approved by the CoC and the Adjudicating Authority but was based on a process tainted by these irregularities. The Tribunal referred to a recent Supreme Court judgment emphasizing that procedural safeguards are substantive protections, and failure to adhere to them vitiates the process and may nullify actions taken pursuant to the Resolution Plan.Application of Law to Facts: Given the established material irregularities by the IRP, the approval of the Resolution Plan was affected. The Tribunal held that such irregularities could not be overlooked merely because the CoC approved the plan, as the integrity of the CIRP process is paramount.Treatment of Competing Arguments: The Respondent and CoC argued that the Resolution Plan was approved by 100% CoC voting, implemented, and payments made, rendering appeals infructuous. The Tribunal acknowledged this but held that procedural irregularities affecting the process's fairness warranted setting aside the approval.Conclusion: Material irregularities committed by the IRP during CIRP materially affected the validity of the approved Resolution Plan. The Tribunal set aside the approval order and allowed the appeals.Additional Issue: Contempt Petition Regarding Implementation of Resolution PlanThe Appellant filed a Contempt Petition alleging that the Respondent implemented the Resolution Plan despite pending appeals and notices, violating the stay and orders of the Appellate Tribunal. The Adjudicating Authority dismissed the petition without fully considering the evidence.The Tribunal declined to further examine the Contempt Petition in view of allowing the main appeals and disposed of it accordingly.3. SIGNIFICANT HOLDINGS'Thus, we hold that there was no formal and proper appointment of Mr. Kairav Anil Trivedi as Resolution Professional of the Corporate Debtor by the CoC. We also find that CoC did not approve the Respondent No. 1/ Mr. Kairav Anil Trivedi as the Resolution Professional in 1st CoC meeting.''The Respondent No. 1 signed the said MoU with SIPL in violation of the provisions of the Code and the CIRP Regulations.''The SIPL was related party of the Corporate Debtor and Respondent No. 1 gave misleading facts to the CoC in 2nd CoC meeting.''Material irregularities in the CIRP process, including fraudulent conduct, misrepresentation, and violation of statutory provisions by the Resolution Professional, affect the fate of the approved Resolution Plan.''The Hon'ble Supreme Court of India has emphasized that procedural safeguards are substantive protections designed to ensure fairness and transparency and cannot be circumvented for expediency. Any action taken pursuant to a Resolution Plan affected by such irregularities shall stand nullified.''We find merit in both the appeals... The Impugned Order dated 15.05.2023 is set aside.'Core principles established include the necessity of strict adherence to procedural requirements in CIRP, the non-appointment of an IRP as RP without CoC approval invalidates such appointment, unauthorized asset transfers without CoC consent are impermissible, and material irregularities by the Resolution Professional can vitiate the entire resolution process including the approval of the Resolution Plan.The Tribunal's final determination was to allow the appeals, set aside the approval of the Resolution Plan, and direct parties to appear before the Adjudicating Authority for further proceedings. The Contempt Petition was disposed of as infructuous.