2025 (6) TMI 23 - AT - IBC

NCLAT dismisses appeal after CoC refused full repayment despite Corporate Debtor having sufficient funds

M/s RAJPUTANA CONSTRUCTIONS PVT. LTD Versus M/s RAJASTHAN LAND HOLDINGS LIMITED, ANURADHA GUPTA, IL&FS TRANSPORTATION NETWORKS LIMITED, HI-LINE BUILDCON INDIA PRIVATE LIMITED, BHANDARI & CO. And ANURADHA GUPTA, ERSTWHILE RP OF M/s. RAJASTHAN LAND HOLDINGS LIMITED Versus M/s. RAJPUTANA CONSTRUCTIONS PVT. LTD., M/s. HI LINE BUILDCON (INDIA) PVT. LTD., M/s S. BHANDARI & CO., IL&FS TRANSPORTATION NETWORKS LIMITED

NCLAT upheld the termination of CIRP by the Adjudicating Authority where the Corporate Debtor had Rs 7 crore available to repay operational creditors' ... Termination of the Corporate Insolvency Resolution Process ('CIRP') of the Corporate Debtor by the Adjudicating Authority - sufficient funds were available to repay the Operational Creditors - Correctness of decision of the CoC to decline the proposal for acceptance - dragging on with the CIRP proceedings and in the process incurring an exorbitant expenditure towards CIRP cost was arbitrary and unsustainable or not - HELD THAT:- From the deliberations of the seventh CoC meeting, it becomes clear that RCPL has only raised doubts and questions on ITNL’s locus and standing with respect to the settlement proposal but cleverly skirted to address the more relevant and pertinent question as to why the Operational Creditors were unwilling to claim their dues when it was being fully repaid. When sufficient fund was already available with the Corporate Debtor to liquidate the debt of the Corporate Debtor, there are no cogent reasons offered by the Operational Creditors in declining to accept their entire admitted claim and closing the CIRP. The Adjudicating Authority has relied on the judgment of Hon’ble Supreme Court in the matter of E.S. Krishnamurthy Vs Bharath Hi-Tech Builders (P) Ltd. [2021 (12) TMI 683 - SUPREME COURT] wherein it has been clearly held that ultimate purpose of IBC is to facilitate insolvency resolution so as to put the Corporate Debtor back on its feet so as to ensure revival and continuance of the Corporate Debtor. At a time when there was Rs 7 Cr. in the bank account of the Corporate Debtor while the total claim of the Operational Creditors was merely Rs. 26 lakhs, there was no reason for continuing on with the CIRP proceeding. When 100% of the admitted debt of the CoC was being satisfied and yet not being accepted by CoC members, the Adjudicating Authority had not committed any mistake in inferring that there was some other hidden motive on the part of the Operational Creditors to continue with the CIRP. It is well settled that IBC is a beneficial legislation intending to bring back the Corporate Debtor on its feet without letting the value of the assets of the Corporate Debtor suffer a beating. Hence CIRP proceedings against the Corporate Debtor, when pursued coercively or mindlessly, it becomes violative of the quintessential spirit of the insolvency resolution framework. In the present facts of the case, when the Corporate Debtor had sufficient finances in its kitty and was indubitably in a position to wipe off and repay the operational debt qua the three Operational Creditors who are the only members of the CoC and full liability was proposed to be discharged, there seems to have been no rational basis for the Operational Creditors to decline from accepting their outstanding dues. What comes to notice is stubborn reluctance on the part of CoC members to accept the repayment of the operational debt, making it clear that the three Operational Creditors who constituted the CoC were trying to scuttle the resolution of the Corporate Debtor and more interested in pushing the Corporate Debtor into insolvency rather than salvaging the Corporate Debtor from the perils of corporate death - The RCPL with majority stake in the CoC has been trying to take undue advantage of the situation and was being actuated by some other ulterior and dubious motives which had nothing to do with insolvency resolution. This amounts to misuse and abuse of the provisions of IBC. Based on the totality of circumstances, it is convinced that the intent behind continuing of the CIRP proceedings by the Operational Creditor was clearly for reasons other than insolvency resolution. Whether the RP was working in collusion with RCPL and CoC in dragging on with the CIRP proceedings and in the process charging hefty fees and ballooning the CIRP costs? - HELD THAT:- What needs to be seen is whether the RP who is supposed to run the Corporate Debtor as a prudent business person by preserving the all-round interests of all stakeholders lived up to that role appropriately without any arbitrary personal gain. It is an undisputed fact that for an admitted debt of Rs 26 lakhs, the CIRP was allowed to drag on for a four and half years. In contrast to a paltry sum of Rs 26 lakhs of admitted debt, the CIRP cost had inflated to Rs 73 lakhs which was three times the admitted debt of the CoC which on the face of it shows that the Corporate Debtor was burdened with unnecessary and exorbitant expenditure. The CIRP cost had clearly mounted on account of the fees of the RP which was increased from Rs 1,00,000/- to Rs 2,00,000/- per month in the fourth CoC meeting held on 20.03.2020. We also find that the RP had continued to charge fees even when the CIRP had remained stayed from 05.08.2020 to 16.03.2021. The Adjudicating Authority had also relied on the judgment of this Tribunal in Indus Ind Bank Ltd. Vs Rajendra K Bhuta [2022 (4) TMI 1657 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI] wherein it was held that the fee of RP cannot be charged for the duration of a stay on CIRP. The impugned order had not committed any infirmity in directing that RP was to receive only remuneration of Rs 50,000/- per month totalling Rs 21.45 lakhs besides directing the refund of the excess amount of remuneration paid to the RP. As the admitted dues of the Operational Creditors when squared off against the liability of proportionate CIRP costs to be borne by the CoC, a balance amount had become recoverable from the CoC and no dues in respect of the admitted claim of the CoC members survived, the Adjudicating Authority has rightly terminated the CIRP of the Corporate Debtor. Conclusion - i) The termination of CIRP was justified due to the availability of sufficient funds to repay Operational Creditors and the refusal of CoC members to accept repayment, indicating misuse of the insolvency process. ii) The RP's charging of fees during the CIRP stay period was unlawful, and the overall remuneration was disproportionate to the admitted debt, warranting reduction. iii) The Adjudicating Authority's directions for CoC members to proportionately bear CIRP costs were appropriate given the misuse of Corporate Debtor's funds. Appeal dismissed. The core legal questions considered by the Tribunal in these appeals arising under Section 61 of the Insolvency and Bankruptcy Code, 2016 ('IBC') relate to:1. Whether the termination of the Corporate Insolvency Resolution Process ('CIRP') of the Corporate Debtor by the Adjudicating Authority was justified, particularly when sufficient funds were available to repay the Operational Creditors.2. Whether the Committee of Creditors ('CoC') acted with malafide intent in refusing to accept a settlement proposal that would have cleared the admitted operational debts and thereby prematurely or unnecessarily prolonged the CIRP.3. Whether the Resolution Professional ('RP') acted diligently and in accordance with statutory duties, or whether the RP colluded with the CoC to prolong the CIRP and charge excessive fees and costs.4. The appropriateness of the reduction of the RP's fees and the validity of the Adjudicating Authority's observations regarding the RP's conduct.Issue 1: Justification for Termination of CIRP and Refusal of Settlement by CoCThe legal framework governing CIRP under the IBC aims to facilitate insolvency resolution 'in a time-bound manner' for maximization of asset value and revival of the Corporate Debtor, balancing interests of all stakeholders. The Supreme Court's precedent in E.S. Krishnamurthy v. Bharath Hi-Tech Builders (2022) 3 SCC 161 was relied upon, emphasizing that settlements should be encouraged to enable rehabilitation rather than liquidation.The Tribunal noted that the Corporate Debtor had a cash balance of approximately Rs 7 crore during the CIRP, which was more than sufficient to repay the admitted operational debt of Rs 26.76 lakhs owed to the three Operational Creditors constituting the CoC. The ITNL, a related party, had claimed Rs 181 crore, which was disputed and subject to litigation regarding their status and inclusion in the CoC.The Adjudicating Authority had directed the RP to convene CoC meetings to explore settlement possibilities, including a proposal by ITNL to pay off the Operational Creditors in full and withdraw their claims. However, the Operational Creditor with 89.54% voting share (RCPL) refused to accept the settlement, raising objections based on procedural and substantive grounds, including questioning ITNL's locus and alleging fraudulent transactions.The Tribunal found that the refusal of the Operational Creditors to accept full repayment lacked cogent reasons and appeared motivated by 'hidden motives' or 'ulterior and dubious motives' unrelated to insolvency resolution. The Adjudicating Authority's reliance on Rule 11 of the NCLT Rules, 2016, which confers inherent powers to prevent abuse of process, was upheld. The Tribunal also referenced Vallal RCK v. Siva Industries & Holdings Ltd. (2022) 9 SCC 803, which clarified that courts should not interfere with the commercial wisdom of the CoC unless their decisions are arbitrary or irrational.Applying these principles, the Tribunal concluded that the Adjudicating Authority rightly terminated the CIRP as continuation was unwarranted given the Corporate Debtor's liquidity and the CoC's refusal to accept repayment. The prolongation was deemed an abuse of the IBC process.Issue 2: Alleged Malafide Conduct of CoC and RP in Prolonging CIRPThe Adjudicating Authority had observed that the CIRP had dragged on for over four and a half years despite the Corporate Debtor's ability to repay the operational debts early on. The RP's fees and CIRP costs had ballooned to Rs 73.31 lakhs, nearly three times the admitted debt of the CoC, suggesting misuse of the process for private gain.The RP and CoC contended that the delay was caused primarily due to ITNL's persistent litigation to secure a seat in the CoC, including the filing of IA No. 100 of 2020 challenging their 'related-party' classification. The Adjudicating Authority's interim stay of CIRP from August 2020 to March 2021 further prolonged the process.The Tribunal accepted that the protracted litigation by ITNL was a significant cause of delay and that the RP could not be held responsible for the extended CIRP period. It was noted that the RP had no mandate to propose settlements and that ITNL's settlement offer was complicated by ongoing allegations of fraudulent transactions under Sections 66 and 67 of the IBC.However, the Tribunal concurred with the Adjudicating Authority's finding that the RP had charged fees during the CIRP stay period, which was impermissible. The RP's claim for Rs 7,09,090/- for the stay period was held to be unlawful, as supported by precedent from this Tribunal in Indus Ind Bank Ltd. v. Rajendra K Bhuta. Further, the increase in RP's fees from Rs 1,00,000/- to Rs 2,00,000/- per month was questioned since the CIRP began before the applicability of Schedule-II of CIRP Regulations prescribing minimum fees.Overall, while the RP was not responsible for the litigation-induced delay, the Tribunal found merit in the reduction of remuneration due to excessive fees and costs relative to the admitted debt, and the charging of fees during the stay period was improper.Issue 3: RP's Compliance with Statutory Duties and Conduct During CIRPITNL alleged multiple failures by the RP, including non-filing of annual returns and financial statements, failure to hold AGMs, and non-compliance with income tax and GST filings. The RP countered that all statutory duties were diligently performed, including contesting tax assessments, recovering amounts from fraudulent transactions, and protecting assets despite non-cooperation from the Corporate Debtor.The Tribunal refrained from detailed adjudication of these compliance issues, focusing instead on the broader question of whether the RP acted as a prudent business person preserving stakeholder interests. The disproportionate CIRP costs relative to the admitted debt and continuation of CIRP despite sufficient funds suggested imprudence. Nonetheless, the Tribunal recognized that the RP undertook various efforts to preserve value and manage the Corporate Debtor, albeit with some lapses.Issue 4: Reduction of RP's Fees and Expunging RemarksThe Adjudicating Authority reduced the RP's fees to Rs 50,000/- per month for the CIRP duration and directed refund of excess remuneration, citing lack of necessity for prolonged CIRP and improper fee claims during the stay period. The RP challenged this reduction and sought expunction of adverse remarks regarding conduct and performance.The Tribunal upheld the reduction of fees, emphasizing the need to align remuneration with the scale of admitted claims and the duration of CIRP. The charging of fees during the stay period was specifically disallowed. However, the Tribunal did not expressly order expunction of remarks but acknowledged that some observations were punitive and unsubstantiated.Significant Holdings and Core Principles Established'The ultimate purpose of IBC is to facilitate the continuance and rehabilitation of a corporate debtor, as distinct from allowing it to go into liquidation.''Settlements have to be encouraged because the ultimate purpose of IBC is to facilitate the continuance and rehabilitation of a corporate debtor.''The Adjudicating Authority or the Appellate Authority cannot sit in appeal over the commercial wisdom of CoC unless the decision is wholly capricious, arbitrary, irrational and dehors the provisions of the statute or the Rules.''It is a clear case of some hidden motives and misuse of IBC and apparently gives rise to the suspicion of understanding among certain parties to continue the CIRP for some oblique purpose and till the amount lying in the account of the Corporate Debtor is exhausted.''The fee of the Resolution Professional cannot be charged for the duration of a stay on CIRP.''The Adjudicating Authority has inherent powers under Rule 11 of NCLT Rules, 2016 to prevent abuse of the process of the Tribunal.'Final determinations included:The termination of CIRP was justified due to the availability of sufficient funds to repay Operational Creditors and the refusal of CoC members to accept repayment, indicating misuse of the insolvency process.The delay in CIRP was primarily caused by ITNL's litigation and not by the RP or CoC, negating findings of malafide conduct against the RP and CoC.The RP's charging of fees during the CIRP stay period was unlawful, and the overall remuneration was disproportionate to the admitted debt, warranting reduction.The Adjudicating Authority's directions for CoC members to proportionately bear CIRP costs were appropriate given the misuse of Corporate Debtor's funds.Both appeals were dismissed as devoid of merit, affirming the impugned order in its entirety.