2025 (11) TMI 782 - AT - IBC

CIRP invalidated for failing to value and disclose all assets under Reg 35; fresh Form G and three-month restart

IFCI Ltd Versus Raju Palanikunnathil Kesavan RP of Heera Construction Co Pvt Ltd and Royal Heights Projects Pvt Ltd, Kochi

NCLAT held the CIRP defective for failing to value and disclose all assets as required by Reg 35, finding the RP erred in assigning nil value and omitting ... Approval of Resolution Plan - valuation of all assets - violation of Regulation 35 of the CIRP Regulations 2016 - it is alleged that the Resolution Professional not only wrongly dealt with a third party asset in the CIRP but even failed to carry out valuation of such land and had rather assigned Nil value to such valuable piece of land - Corporate Debtor had only developmental rights over the land - land is not owned by Corporate Debtor - land would not be a part of the liquidation estate of the Corporate Debtor - no permit/no construction of the project - HELD THAT:- There is nothing in Regulation 35 of CIRP Regulations which requires computation of fair value and liquidation value of only 'fixed assets' of the Corporate Debtor. All assets of the Corporate Debtor were required to be valued. In this regard, it relevant to take note of the definition of the expressions 'Fair Value' (Reg. 2(hb) of CIRP Regulations) and 'Liquidation Value' (Reg. 2(k) of CIRP Regulations) make reference to 'assets' of the Corporate Debtor and not to only fixed assets of the Corporate Debtor. Further, even the Hon’ble Supreme Court, in Victory Iron Works Ltd. v. Jitendra Lohia & Anr. [2023 (3) TMI 699 - SUPREME COURT] had observed that, for the purposes of the IBC, the expression 'asset' includes properties of every kind including rights and entitlements arising out of or incidental to the property. A bare perusal of Regulation 35 shows there is nothing in the Regulation that limits its scope and ambit only to fixed assets of the Corporate Debtor. All that this Regulation requires is, where all the assets of the Corporate Debtor include fixed assets, a physical verification exercise would be required to be carried out by the Resolution Professional - it is clear that the expression assets of Corporate Debtor refer to all 'assets' of the Corporate Debtor, including financial assets, fixed assets, tangible assets, intangible assets, etc. It is now an admitted position several assets existed which were never a part of information memorandum of the CIRP of Corporate Debtor and the registered value(s) of such assets, as per ED attachment order dated 12.01.2024 ran into crores Rs.23.35 crore approximately for 23 assets and the market value of which may even be higher, but many were left out. The argument of the Resolution Professional he was not present during the ED operation and/or was not at fault or he had no control over the office of Corporate Debtor cannot be accepted. For proper exercise of commercial wisdom by the Committee of Creditors all aspects should have been placed before the Committee of Creditors. Admittedly during the pendency of this appeal various valuable new assets have since been detected which were admittedly not a part of the Corporate Insolvency Resolution Process of Corporate Debtor at all. Thus when crucial aspects were never placed before the Committee of Creditors it cannot be said the Committee of Creditors’ commercial decision would prevail, as all ‘relevant information’ was not available before it. It is also constrained to find six years have lapsed since initiation of the Corporate Insolvency Resolution Process but admittedly no steps have been taken by the Successful Resolution Applicant for completion of the project as per schedule contemplated in the Resolution Plan, despite there being no stay against the implementation of the Resolution Plan. Thus, in view of various infirmities in the CIRP of Corporate Debtor, this is a fit case for issuance of fresh Form G and the entire process including the consideration of Resolution Plan be completed within a period of three months from today. Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether the Resolution Professional was required to identify, include and value all assets (including third-party interests and developmental rights) of the corporate debtor in the Information Memorandum and under Regulation 35 of the CIRP Regulations. 2. Whether a resolution plan can extinguish or divest an existing security interest of a secured creditor over third-party mortgaged property or over property giving rise to development entitlements without statutory basis and adequate valuation. 3. Whether omission or non-disclosure of material assets (including assets later revealed by law-enforcement attachment/search) and failure to place such information before the Committee of Creditors vitiates the commercial wisdom of the CoC and mandates re-commencement of the solicitation process (fresh Form G/valuation and time-bound process). 4. Whether a clause in the resolution plan that vests 'all assets ... whether reflected in the books or not' in the corporate debtor free from encumbrances (thereby potentially transferring newly discovered assets to the successful resolution applicant without consideration) is permissible. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Duty to identify, include and value all assets (including developmental rights) in the Information Memorandum / Regulation 35 Legal framework: Section 25(2)(a) casts a duty on the Resolution Professional to take custody and control of all assets of the corporate debtor; Section 29 and Regulation 36 require the Information Memorandum to include all assets and liabilities; Regulation 35 requires registered valuers to estimate fair value and liquidation value of the corporate debtor's assets after physical verification. Precedent Treatment: The Court applied the established authoritative construction that 'asset' includes rights and entitlements (including developmental rights) and is not confined to 'fixed assets'; that such rights must be considered and valued in CIRP valuation exercises. Interpretation and reasoning: Regulation 35 and the definitions of 'fair value' and 'liquidation value' refer to 'assets' broadly; nothing in Regulation 35 limits valuation to only fixed assets. Where a corporate debtor holds developmental rights or other property interests (even if not reflected in audited books), those constitute assets that ought to be identified, included in the Information Memorandum and valued by the RP and registered valuers. Physical verification may be required for certain asset classes, but absence from books does not absolve the RP of his duty. Ratio vs. Obiter: Ratio - RP's obligation extends to all assets and asset-like rights; omission to value such assets when information or documentation exists is a material failure. Obiter - nuances concerning practical difficulties where title deeds are wholly unavailable. Conclusion: The RP erred in excluding and assigning nil value to certain assets (including a corporate debtor's land interest and a third-party mortgaged parcel where development rights existed) without proper valuation and inclusion in the Information Memorandum, contrary to Regulation 35 and related provisions. Issue 2 - Extinguishment of secured creditor's interest over third-party mortgaged property by resolution plan Legal framework: The Code recognises assets, security interests and the rights of secured creditors; a resolution plan must respect existing lawful encumbrances unless lawfully altered; duties of RP and the adjudicating authority include scrutiny of lawfulness of plan terms. Precedent Treatment: The Court applied the principle that a resolution plan cannot lawfully extinguish third-party security interests without a clear statutory/contractual basis and proper valuation/notice; prior higher authority rejecting similar blanket clauses was followed as persuasive for the proposition that such terms cannot be rubber-stamped by CoC voting. Interpretation and reasoning: Where a third party mortgaged property secures a creditor's loan (even if corporate debtor has only developmental rights), the security interest cannot be treated as extinguished by assigning nil value or by a plan clause that purports to vest assets free of encumbrances. The plan must set out the legal basis for extinguishment and account for the secured creditor's rights; failure to do so results in stripping a creditor of its security without due process. Ratio vs. Obiter: Ratio - A resolution plan cannot extinguish or nullify a secured creditor's lawful charge over property (including where the corporate debtor has development entitlements) without lawful basis and proper valuation/notice. Obiter - observations on the precise interplay between joint-venture development entitlements and mortgage security where complex contractual regimes exist. Conclusion: The extinction of the appellant's security over the third-party mortgaged parcel (or the unilateral treatment of the secured interest as nil) in the impugned plan is impermissible; the RP and plan failed to justify extinguishment under law. Issue 3 - Non-disclosure/omission of material assets and effect on CoC commercial wisdom; need for fresh valuation/Form G and time-bound re-process Legal framework: Regulation 36 and Section 29 require full disclosure of assets and material proceedings; the adjudicating authority must ensure resolution plans are not tainted by material irregularity; the appellate jurisdiction includes reviewing whether commercial decision was taken on adequate information. Precedent Treatment: The Tribunal followed earlier tribunal rulings holding that omission of material assets from the Information Memorandum and valuation that places the SRA in an advantageous in rem position over prospective applicants is a material irregularity necessitating fresh invitation/valuation and completion within a time frame. Interpretation and reasoning: Discovery during law-enforcement action of multiple assets (including sale deeds seized) which were not included in the Information Memorandum, coupled with RP's failure to account for such assets despite availability of records or constructive knowledge, is a material non-disclosure. Such omissions undermine the Committee of Creditors' ability to exercise informed commercial wisdom; a CoC decision made without relevant information cannot be treated as conclusive. Where new assets materially affect fair or liquidation value, a fresh Form G and valuation process are warranted to ensure fair opportunity and market-driven competition. Ratio vs. Obiter: Ratio - Material omission of assets from the Information Memorandum that would affect valuation and prospective bidding vitiates the CoC decision and requires re-solicitation (fresh Form G/valuation) in a time-bound manner. Obiter - comments on RP's excuses about physical presence during searches and procedural lapses. Conclusion: The failure to disclose and value materially relevant assets (including those revealed by search/attachment) vitiated the CoC's commercial decision and mandated issuance of fresh Form G, fresh valuation, and completion of the process within a specified short period. Issue 4 - Legality of a resolution plan clause vesting all assets 'whether reflected in the books or not' free of encumbrances in the corporate debtor / SRA Legal framework: Resolution plans must be lawful and cannot contain terms contrary to law; the adjudicating authority must scrutinise plans for illegality regardless of CoC approval. Precedent Treatment: The Court relied on established principle that clauses attempting to nullify third-party or creditor rights by blanket language are impermissible and have been disapproved by higher authorities. Interpretation and reasoning: A clause purporting to vest 'all assets ... whether reflected in the books or not' free from encumbrances grants the SRA a windfall by appropriating newly discovered or previously undisclosed assets without consideration and without respecting existing encumbrances or secured creditor rights. Such a clause, if operational, would subvert statutory protections for secured creditors and distort bidding equality. Approval of a plan containing such a clause, without clear limitations and safeguards, cannot be sustained. Ratio vs. Obiter: Ratio - A resolution plan must not contain clauses that effectively transfer newly discovered assets free of encumbrances to the SRA without lawful basis; such terms are illegal and cannot be validated by CoC majority alone. Obiter - observations on permissible drafting that respects encumbrances and provides mechanisms for adjudicating competing claims. Conclusion: Clause purporting to vest all assets, including undisclosed ones, free of encumbrances in the corporate debtor/SRA is legally objectionable; reliance on such clause to appropriate omitted assets is impermissible and supports setting aside approval pending fresh process. Remedial and consequential direction (ratio applied) Because of the RP's failure to include and value material assets, the presence of a plan clause capable of appropriating undisclosed assets free of encumbrances, and resultant impairment of CoC's informed commercial decision, the appropriate relief is to set aside the approval outcome and direct a fresh valuation and issuance of Form G with a time-bound completion of the resolution solicitation and consideration process (three months specified by the Court).