2025 (9) TMI 1610 - SC - IBC

Appeals dismissed; resolution plan approval and implementation framework upheld; creditors' committee continues until plan implementation or liquidation

Kalyani Transco Versus M/s Bhushan Power And Steel Limited And Others

SC dismissed the appeals, upholding approval and implementation framework of the resolution process. Court found appellants (erstwhile promoters) acted to ... Locus of the erstwhile promoters of the Corporate Debtor - Conduct of Erstwhile Promoters - Existence of the CoC after approval of the Resolution Plan by the Adjudicating Authority - Delay in implementation of the Resolution Plan - Upfront infusion of funds - Distribution of EBITDA - Contingent claim of Jaldhi - Pre-CIRP dues of Medi and Darcl. Locus standi of the erstwhile promoters - HELD THAT:- It can be seen that the IBC was brought in to consolidate the laws related to the reorganization and insolvency resolution of corporate persons in a time – bound manner which would result in the promotion of entrepreneurship and the balancing of the interests of all shareholders. The main purpose of the enactment therefore is to ensure that the company undergoing insolvency proceedings is revived or liquidated expeditiously within a stipulated timeframe. A bare perusal of Section 12 of the IBC reveals that precise timelines have been provided for all the different steps that have to be taken during the CIRP of a company. The proviso to Section 12 of the IBC states that any extension to the fixed timelines may not be granted more than once. This further shows that the IBC does not allow any undue delays in the completion of the CIRP of a company - It is thus clear that the IBC proposes to carry out the Resolution Process of a Company expeditiously in a time – bound fashion. Since the Resolution Plan also affects the rights of the guarantors, it is found that the SRA – JSW and the CoC are not right in submitting that the appeals at the instance of the appellants would not be maintainable. In any case, rather than nonsuiting the appellants on the ground of locus, it is proposed to decide the appeals on merits after considering the submissions made on behalf of all the parties. However, while doing so, it will also be apposite to consider the conduct of the erstwhile promoters during the CIRP. Conduct of Erstwhile Promoters - HELD THAT:- There is a delay in the pronouncement of the approval order by the NCLT. A specific observation has been made by the NCLT that the erstwhile promoters were making efforts to cause delays which indicated how desperate and frustrated they were. The NCLT also imposed a cost of Rs. 1 Lakh on the Appellants – erstwhile promoters as it concluded that the application seeking copies of the Resolution Plan filed by them was frivolous - It can thus clearly be seen that the entire attempt of the appellants has been to thwart the CIRP and to not permit the same to be taken to a logical end. Existence of the CoC after approval of the Resolution Plan by the Adjudicating Authority - HELD THAT:- As per Section 20 of the IBC, the IRP is required to make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern. It will further be relevant to note that, under Section 21 of the IBC, the IRP, after collation of all claims received against the Corporate Debtor and determination of the financial position of the Corporate Debtor, is required to constitute a CoC. Under Section 21 of the IBC, the CoC must be comprised of all FCs of the Corporate Debtor. However, proviso to sub-section (2) of Section 21 of the IBC provides that if a financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub-section (6-A) or sub-section (5) of Section 24 of the IBC is a related party of the corporate debtor, he shall not have any right of representation, participation or voting in a meeting of the CoC. No doubt that the second proviso thereof excludes certain related parties of a corporate debtor from the applicability of the first proviso. However, the same would not be relevant for the purpose of the present matter. Section 24 of the IBC deals with the meeting of the creditors. Sub-section (1) of Section 28 of the IBC, which begins with a non-obstante clause, requires that the RP, during the CIRP, shall not take any of the actions therein without the prior approval of the CoC. Such decisions are required to be taken by the CoC after putting the matters enumerated in sub-section (1) thereof to vote. Under subsection (4) of Section 30 of the IBC, the CoC considers approval of resolution plan by a vote of not less than 66% of voting share of the financial creditors. Explanation to clause 2 of Regulation 18 of the IBBI (CIRP) Regulations clarifies the position. It empowers the CoC to hold meetings till either the Resolution Plan is approved under Section 31(1) of the IBC or an order for liquidation is passed under Section 33 of the IBC. It is empowered to decide all the matters except the matters which do not affect the Resolution Plan submitted before the Adjudicating Authority - in view of Explanation to clause 2 of Regulation 18 of the IBBI (CIRP) Regulations, the CoC continues to exist till the Resolution Plan is implemented or an order of liquidation is passed under Section 33 of the IBC. It will not be out of place to mention that the cloud of uncertainty exists till a finality is given by this Court in the proceedings under Section 62 of the IBC. The clause (3) of the Resolution Plan neither provided modification nor withdrawal from the Resolution Plan. The said cannot therefore be stated to be an open ended or indeterminate plan solely at the discretion of the resolution applicant. Under the said clause, there is neither a provision for withdrawal nor modification of the Resolution Plan nor are there any negotiations envisaged under the said clause of the Resolution Plan submitted by the SRA – JSW in the present matter. Delay in implementation of the Resolution Plan - HELD THAT:- There have been several impediments in the implementation of the Resolution Plan by the SRA – JSW. After the Resolution Plan was approved by the CoC on 15th October 2018 and an application was filed by RP for approval of Resolution Plan on 14th February 2019. Thereafter, the CBI filed an FIR on 5th April 2019 against the Corporate Debtor – BPSL and its erstwhile management for large scale siphoning and diversion of funds. Immediately thereafter, the SRA - JSW filed an additional affidavit before the NCLT on 15th April 2019 seeking protection from acts/omissions of the erstwhile management of the Corporate Debtor for alleged breach under the applicable laws including under IPC, PC Act and PMLA. Based on the CBI’s FIR, the ED registered an ECIR bearing DLZO-1/02/2019 against the Corporate Debtor – BPSL and its erstwhile management. In the present case, even after the IBC was amended and Section 32A of the IBC was brought into the statute, the ED was proceeding further with its prosecution of the Corporate Debtor. On account of the pendency of such proceedings, the CoC was not in a position to hand over the unencumbered assets as required under the Resolution Plan. Thus, with regard to the CCDs being equivalent to equity instruments and the specific stand of the CoC, it is not found that there is any merit in the contention of the appellants in this regard and the same is liable to be rejected. Distribution of EBITDA - entitlement of the lenders to EBITDA - HELD THAT:- There is nothing produced by the appellants to show any agreement with the RP after the CIRP commenced. Even though the RP admits that payments towards pre – CIRP dues were in fact made, it is also candidly accepted by the RP that the same was a mistake on the part of an accounting clerk. Upon discovering this mistake, the RP had quickly taken steps to mitigate the same and the payments were adjusted towards the services rendered by the Appellants during the CIRP period. There is nothing on record that shows that the CoC had approved such pre – CIRP payments and such payments to the appellants find no mention anywhere in the Resolution Plan. This Court has, time and again, held through a catena of judgments that any and all payments made to creditors relating to the pre – CIRP dues must be done only in accordance with the Resolution Plan and with the express agreement of the CoC. Therefore, it is not found that any new question of law being raised through the present appeals and thus, they are liable to be dismissed. There are no merit in the appeals. The appeals are therefore dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether erstwhile promoters (personal guarantors/directors) are 'persons aggrieved' entitled to file appeals under Section 62 of the IBC in relation to approval/implementation of a resolution plan. 2. Whether the Committee of Creditors (CoC) becomes functus officio on approval of a resolution plan by the Adjudicating Authority, or continues to have power to act (including constituting / operating a monitoring committee) until plan implementation or liquidation. 3. Whether a resolution plan clause permitting extension of the implementation period by a 66% majority of lenders is impermissibly open-ended or contrary to the IBC's time-bound scheme. 4. Whether delay in implementation of the approved resolution plan (approx. 18 months) justified setting aside the plan or attracting interest/liability on the successful resolution applicant. 5. Whether payments made to financial creditors before operational creditors (and related treatment of ex-gratia payments to OCs) contravened Regulation 38 of the IBBI (CIRP) Regulations as applicable at relevant times. 6. Whether instruments issued as compulsorily convertible debentures (CCDs) can be treated as equity to satisfy 'upfront infusion' commitments in a resolution plan. 7. Whether EBITDA (profits generated during CIRP) earned by the corporate debtor during the CIRP is distributable to creditors notwithstanding silence of the RfRP / resolution plan, and whether lenders/CoC can raise entitlement to EBITDA after plan approval. 8. Whether reclassification of a large operational creditor's admitted claim as 'contingent' (with lower payout) was impermissible and vulnerable to challenge. 9. Whether payments characterized as pre-CIRP dues (to incentivize continued services) but later reclassified as CIRP-period payments can sustain appeals for additional relief. --- ISSUE-WISE DETAILED ANALYSIS 1. Locus of erstwhile promoters to file appeals under Section 62 Legal framework: Section 62 permits appeals to the Supreme Court by any 'person aggrieved' from NCLAT orders; IBC's objectives and provisions (Preamble, Sections 12, 20, 21, 30, 60) inform the scope of 'person aggrieved'. Precedent treatment: Prior decisions have recognized that guarantors/erstwhile board members may be 'persons aggrieved' where resolution plans affect their rights; authorities cited emphasize purposive interpretation aligned with IBC objectives. Interpretation and reasoning: The Court held that promoters who are personal guarantors and whose rights are vitally affected by a resolution plan fall within 'persons aggrieved'. Rather than non-suiting on locus, the Court proceeded to decide the appeals on merits while noting promoters' conduct during CIRP. Ratio vs. Obiter: Ratio - personal guarantors/erstwhile board members can be persons aggrieved if the plan impacts their rights; Court retains discretion to decide merits notwithstanding locus contentions. Conclusion: Promoters had maintainable locus; however, their dilatory conduct during CIRP was recorded and relevant to merits. 2. Continuity and powers of the CoC after plan approval Legal framework: Sections 21, 24, 28, 30 of IBC; Regulation 18 and Regulation 38 of IBBI (CIRP) Regulations (including later amendments and Explanation to Reg.18(2)); statutory duty to monitor implementation. Precedent treatment: The statutory scheme contemplates CoC involvement during CIRP and provides for monitoring mechanisms; later regulatory amendments made consideration/constitution of monitoring committee mandatory. Interpretation and reasoning: The Court rejected the functus officio argument. Explanation to Reg.18(2) and Reg.38 reflect legislative intent that CoC may continue to convene meetings and supervise implementation until plan is implemented or liquidation ordered. Allowing CoC to act post-approval avoids lacunae and ensures creditors' interests are protected while appeals or implementation issues remain pending. Ratio vs. Obiter: Ratio - CoC continues in existence and retains power (including to constitute/operate a monitoring committee) until either implementation of the resolution plan or an order for liquidation under Section 33; CoC decisions on implementation fall within commercial wisdom. Conclusion: CoC does not become functus officio on approval; its continuing interest justifies post-approval actions to supervise/enable implementation. 3. Legality of clause permitting CoC to extend implementation period by 66% majority Legal framework: Section 12 (strict timelines and limited extensions), Section 30 (content of resolution plan), Regulation 38; jurisprudence disallowing renegotiation of plans post-submission (Ebix, Amtek principles). Precedent treatment: Courts have held that once a resolution plan is approved it cannot be renegotiated or altered; but distinctions drawn where clause reserves limited extension powers to CoC for effective implementation. Interpretation and reasoning: Clause permitting CoC-approved extension of the effective date (by 66% majority) was not a modification of the plan's substantive terms but a reservation of a limited administrative discretion to extend the implementation timeframe to address exigencies. It neither allowed renegotiation nor withdrawal of the plan. Ratio vs. Obiter: Ratio - a clause permitting limited, creditor-approved extension of implementation does not, by itself, render a plan indeterminate or unlawful; such administrative extensions are permissible provided they do not alter substantive commitments of the plan. Conclusion: Clause was valid; differentiation made from impermissible renegotiation decisions (Amtek) where substantive terms were sought to be altered. 4. Delay in implementation - whether it vitiates the plan Legal framework: Section 12 time limits; consequences of prolonged non-implementation in precedent (Murari Lal Jalan); equitable considerations where external impediments intervene. Precedent treatment: Delays attributable to the successful resolution applicant have led to plan rejection; but delays caused by external impediments or stays require contextual assessment. Interpretation and reasoning: The Court traced facts showing multiple external impediments (criminal/FIR/ED provisional attachment, stays by NCLAT, pendency of challenges, need for clarity on Section 32A, interlocutory orders from this Court) impeded implementation. CoC and SRA acted jointly to secure handover of unencumbered assets; CoC passed a resolution to extend the effective date and the plan was implemented thereafter. Hence delay was not attributable to SRA alone nor was it inordinate in the sense warranting rejection. Ratio vs. Obiter: Ratio - implementation delay does not automatically vitiate an approved plan where delay arises from legitimate, external impediments and creditors (CoC) exercise commercial judgment to permit extension and implementation. Conclusion: Delay did not justify setting aside the plan or imposing consequences on SRA where credible external causes existed and CoC approved extension. 5. Priority of payments to Operational Creditors (OCs) vs Financial Creditors (FCs) Legal framework: Regulation 38(1)(b) (original and subsequent amendments dated October and November 2018/2019) prescribing priority/payments to OCs; Section 30(2)(b) and later amendments; non-retrospective application of subsequent regulatory changes. Precedent treatment: Statutory text and Board regulations govern mandatory contents; retrospective application requires explicit intent. Interpretation and reasoning: At the time the resolution plan (with addendum) was approved by NCLT (5 Sept 2019), the earlier formulation governed and the plan stated liquidation value to OCs was nil but an ex-gratia payment was proposed. Subsequent Regulation amendment (27 Nov 2019) post-dates NCLT approval and cannot be applied retrospectively. The ex-gratia payments to OCs were not 'amounts due' under the plan and therefore did not contravene the law as it stood on approval date. Ratio vs. Obiter: Ratio - later regulatory amendments cannot be applied retrospectively to invalidate an approved plan; ex-gratia payments not forming part of amounts due under an approved plan do not automatically violate Regulation 38 as it then stood. Conclusion: No contravention established on payments ordering; objection by promoters on this ground rejected. 6. Treating CCDs as equity to satisfy upfront infusion commitments Legal framework: Principles distinguishing CCDs from debt under company law and prior precedent treating compulsorily convertible instruments as equity for relevant purposes. Precedent treatment: Earlier authoritative rulings hold CCDs to be akin to equity where conversion is compulsory and no repayment obligation exists. Interpretation and reasoning: The CCDs issued (five-year term with mandatory conversion) met the tests in precedent and CoC recorded approval/acceptance of CCD issuance as satisfying upfront infusion. Given settled jurisprudence and CoC's commercial wisdom, CCDs qualify as equity infusion for resolution plan compliance. Ratio vs. Obiter: Ratio - compulsorily convertible debentures, mandatorily convertible into equity, are to be treated as equity instruments for purposes of fulfilling an upfront equity infusion commitment in a resolution plan. Conclusion: CCDs satisfied the upfront infusion obligation; appellants' challenge rejected. 7. Entitlement and distribution of EBITDA generated during CIRP Legal framework: Section 25 (RfRP), Section 30/31 (resolution plan content/finality), relevant precedents on distribution of profits/EBITDA, and doctrine that claims outside approved plan stand frozen. Precedent treatment: Supreme Court authority (Essar) held that a successful resolution applicant cannot be faced with 'undecided' claims post-approval and that distribution of profits during CIRP is governed by the RfRP/process document; NCLAT decisions to the contrary were set aside. Interpretation and reasoning: The RfRP and resolution plan were silent on EBITDA distribution; CoC earlier (post-NCLAT) resolved that EBITDA remain with the company in line with the controlling Supreme Court precedent. The CoC and parties had taken a consistent stand before courts; later attempts by CoC/promoters to reopen entitlement to EBITDA after plan approval/review petitions were rejected as inconsistent and undermining the finality and commercial predictability of the resolution process. Reopening such claims would contravene the 'frozen claims' doctrine and permit hydra-head claims. Ratio vs. Obiter: Ratio - EBITDA distribution cannot be compelled where RfRP/resolution plan is silent and the successful resolution applicant relied on the process documents; claims not part of RfRP/resolution plan stand frozen post-approval and cannot be reopened except as provided by statute. Conclusion: No entitlement of lenders/promoters to EBITDA where process documents are silent; attempts to revive such claims at this stage dismissed. 8. Classification of a creditor's admitted claim as 'contingent' (re Jaldhi) Legal framework: Admission of claims by resolution professional, CoC's power to accept/classify and sanction plan under commercial wisdom principles; enforcement of foreign awards under Arbitration Act requires domestic enforceability. Precedent treatment: CoC's commercial decisions on classification/valuation of claims are protected from judicial interference (K. Sashidhar and successors). Interpretation and reasoning: The creditor had adopted inconsistent positions before forums (earlier treating claim as contingent and later seeking crystallization). Enforcement of foreign arbitral awards in India requires domestic enforcement proceedings; the creditor had withdrawn enforcement proceedings before domestic court, undermining crystallization argument. CoC's decision to treat the claim as contingent formed part of its commercial assessment and was approved by CoC; such classification is non-justiciable absent statutory grounds under Section 61. Ratio vs. Obiter: Ratio - reclassification/valuation of claims by CoC (including treatment of contingent vs crystallized) falls within CoC's commercial domain and is not to be upset unless statutory grounds for interference exist. Conclusion: Classification as contingent was sustainable; appeal on this ground dismissed. 9. Pre-CIRP dues alleged to have been paid as incentive to continue services (Medi/Darcl) Legal framework: RP's duty to manage operations (Sections 14, 20, 23, 25), RP's accounting/approval obligations, and requirement that payments must conform to resolution plan and CoC approvals. Precedent treatment: Payments of pre-CIRP dues require express CoC approval or plan provision; inadvertent payments corrected/adjusted have limited remedial scope. Interpretation and reasoning: Record showed payments were made and subsequently treated as an accountancy mistake; RP rectified by adjusting payments against CIRP-period dues and there was no CoC approval for pre-CIRP payments nor plan provision. NCLT/NCLAT findings on same were concurrent and not susceptible to interference. Ratio vs. Obiter: Ratio - isolated/erroneous pre-CIRP payments not approved by CoC and not incorporated in resolution plan do not give rise to new legal questions warranting reversal. Conclusion: Appeals regarding pre-CIRP payment recharacterization failed; no interference warranted. --- OVERALL CONCLUSION The Court upheld the finality and commercial sanctity of the approved resolution plan subject to statutory limits: promoters had locus but their challenges failed on merits; CoC retains supervisory role post-approval until implementation/liquidation; limited creditor-approved extensions of implementation are permissible; delays attributable to external impediments did not vitiate the plan; CCDs qualifying as compulsorily convertible instruments constitute equity for infusion commitments; EBITDA claims could not be reopened where RfRP/resolution plan are silent; creditor classification and RP accounting adjustments fell within commercial/administrative domain and did not warrant setting aside the plan. The impugned appellate order was therefore upheld and the appeals dismissed.