Appellant's 39.4% negative vote blocks interim finance; s.28 and Reg 34(B) bar compelled CIRP cost contributions

NCLAT allowed the appeal and set aside the impugned order (no order as to costs). The Tribunal held the RP could not compel the Appellant to contribute CIRP costs absent proper interim finance approval by a 66% CoC vote under s.28; Regulation 34(B) permits only RP fees to be paid from available CD funds or via approved interim finance. The Appellant's 39.4% negative vote defeated the resolution to raise interim finance, so the prior order requiring proportionate contribution was a legal error and was overturned.

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ISSUES PRESENTED AND CONSIDERED

1. Whether a Resolution Professional (RP) can compel members of the Committee of Creditors (CoC) to pay "contribution" towards corporate insolvency resolution process (CIRP) costs in the absence of a CoC resolution obtaining sixty-six percent (66%) voting share as required for raising interim finance under Section 28 of the Code.

2. Whether Regulation 34B(5) (and Regulations 33-34 read together) permits recovery of the RP's fees and other insolvency resolution process costs from funds "contributed" by CoC members independent of the mechanism and safeguards provided for raising interim finance under Section 28.

3. Whether the Adjudicating Authority committed a jurisdictional/procedural error by allowing the RP's application directing payment by a CoC member without issuing notice or affording an opportunity to be heard.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Compulsion to pay "contribution" towards CIRP costs absent 66% CoC approval

Legal framework: Section 5(13) defines insolvency resolution process costs and expressly includes amounts of any interim finance and costs incurred in raising such finance; Section 5(15) defines interim finance as any financial debt raised by the RP during CIRP; Section 28(1)(a) prohibits the RP from raising interim finance without prior CoC approval and Section 28(3) requires 66% voting share for such approval; Regulation 33-34 make expenses ratified by the CoC part of insolvency resolution process costs.

Precedent treatment: No contrary judicial authority was relied upon or applied by the Tribunal in the impugned order; the Court examined statutory text and scheme rather than authority.

Interpretation and reasoning: The Court treated "contribution" sought by the RP as functionally equivalent to raising interim finance because the RP sought additional funds to meet CIRP costs shortfall (funds available Rs.35 lakh vs estimated CIRP costs Rs.1.85 crore and an interim proposal of Rs.1 crore). Section 5(13)(a) ties insolvency costs to interim finance and its costs; Section 28 creates a protective mechanism requiring 66% CoC approval before the RP may raise interim finance. The RP's invocation of Regulation 33/34 did not displace Section 28's express requirement where the RP effectively sought funds beyond available corporate debtor funds. The Court concluded that where the RP's request entails raising money (even by apportionment to CoC members), the Code's procedure for interim finance - including the 66% threshold - applies.

Ratio vs. Obiter: Ratio - a direction compelling a CoC member to pay an apportionment of CIRP costs that amounts to raising interim finance is impermissible unless the CoC approved the same by the statutory 66% voting share under Section 28. Obiter - observations on practical participation of the creditor in other CoC resolutions (vote history) are factual and illustrative, not foundational to the legal rule.

Conclusion: The impugned order directing payment by the CoC member (holding 39.4% voting share) was unsustainable because the CoC did not approve the proposed funding by the requisite 66% vote; the RP could not bypass Section 28 by labelling the demand a "contribution".

Issue 2: Scope of Regulation 34B(5) and interplay with Regulations 33-34 and Section 28

Legal framework: Regulations 33 and 34 designate that expenses fixed by applicant/committee constitute insolvency resolution process costs and are to be ratified by the CoC; Regulation 34B(5) (inserted w.e.f. 13.09.2022) provides that the RP's fee may be paid "from the funds, available with the corporate debtor, contributed by the applicant or members of the committee and/or raised by way of interim finance" and shall be included in insolvency resolution process costs.

Precedent treatment: No precedent was relied upon; the Court construed Regulation 34B in light of the Code's hierarchy and Section 28 safeguards.

Interpretation and reasoning: The Court read Regulation 34B(5) as permissive but not enlarging the RP's powers to raise monies contrary to Section 28. The proper interpretation is that the RP may be paid from (a) funds already available with the corporate debtor, (b) funds previously contributed by CoC members (i.e., already placed with the CD), or (c) interim finance raised in accordance with Section 28. Regulation 34B(5) does not create an independent mechanism by which the RP can compel CoC members to contribute funds outside the Section 28 process. The absence of the word "contribution" in Regulations 33-34 and the statutory definition of interim finance in Section 5(15) informed this construction: where raising funds is necessary, the Code prescribes the 66% CoC approval route to protect the CD's distressed estate from unilateral or ad hoc financial impositions.

Ratio vs. Obiter: Ratio - Regulation 34B(5) does not authorize compelling CoC members to make fresh contributions that amount to interim finance without satisfying Section 28; it contemplates payment from already available/raised funds or properly approved interim finance. Obiter - comments about the legislative intent behind insertion of Regulation 34B and policy considerations are ancillary observations.

Conclusion: Regulation 34B(5) cannot be used to validate a direction for immediate payment by CoC members opposite to a failed 66% approval; the RP's remedy to meet shortfall was to secure interim finance in compliance with Section 28, which was not done.

Issue 3: Procedural infirmity - order passed without notice or opportunity to be heard

Legal framework: Principles of natural justice and statutory process require that parties affected by an order be given an opportunity to be heard; the Adjudicating Authority's practice of listing applications and issuing notice is part of procedural fairness in adjudicatory proceedings.

Precedent treatment: No specific authority cited; the Court relied on admitted record showing lack of notice and non-parawise reply.

Interpretation and reasoning: The record admitted that the application was listed multiple times without issuance of notice to the affected CoC member, and the Adjudicating Authority allowed the RP's prayer by directing payment within ten days without assigning reasons or hearing the person ordered to pay. Even if the legal thrust of the application could be opposed on merits (see Issues 1-2), the procedural denial of opportunity to respond compounded the illegality because the order purportedly imposed a financial obligation on a CoC member without affording hearing. The Court noted absence of denial by respondents to this factual position.

Ratio vs. Obiter: Ratio - an order imposing a financial obligation on a creditor arising from an RP's application must be preceded by notice and an opportunity to be heard; absence of such procedure is a ground to set aside the order. Obiter - the Court's observation that respondents did not parawise the reply is an evidentiary remark not central to legal doctrine.

Conclusion: Independent of substantive infirmity, the impugned order was vitiated for having been passed without notice and without affording the affected CoC member an opportunity to file reply or be heard; that procedural lapse reinforced setting aside the order.

Overall Conclusion and Disposition

The Adjudicating Authority erred both on merits and procedure: (a) it permitted recovery labelled as "contribution" which in substance sought to raise funds for CIRP costs without the mandatory 66% CoC approval for interim finance under Section 28, contrary to the Code's scheme and the interpretation of Regulations 33-34 and 34B; and (b) it directed payment against a CoC member without issuing notice or hearing that member. Accordingly, the impugned order directing payment was set aside; the appeal was allowed and ancillary IAs were closed, with no order as to costs.

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