2025 (11) TMI 1345 - AT - IBC

NCLAT: Only material irregularities in CIRP Regulations justify setting aside Section 31 IBC resolution plan approval challenge

Dorni Vinimoy Private Limited and Yaana Apparels Pvt. Ltd. & Ors. Versus Rachna Anchalia Resolution Professional of Imperial Tubes Private Limited & Ors.

NCLAT held that mere procedural deviations from CIRP Regulations do not automatically vitiate the resolution process; only a 'material irregularity' that ... Condonation of delay in submitting Expression of Interest (EoI) - collusion between CoC, RP and entrant resulting in material irregularity - partcipation of entrant concealed from the other PRAs - violation of specific CIRP Regulations constituting material irregularity - HELD THAT:- The deviation in the manner of achieving the legislative intent, as a rule, is neither prescribed nor recommended, but when it occurs, it does not always invalidate what is done in violation of a regulation either. It depends on multiple factors, and hence the focus must be to engage objectively in an impact assessment of the consequence an alleged violation of the Regulation has produced: has it (deviation from regulation) produced a result which are plainly illegal, or has been so unfair that it offends the integrity of the resolution process. If despite the violation of any Regulation, the consequences it produced falls short of what is stated herein above, why should there be a hurry to invalidate an act so done? It could now be derived, that while breach of a procedure as prescribed is not recommended, yet if the violation is not material, the act done contrary to a Regulation can still be saved. It could now be further derived that any irregularity, founded on any breach of a Regulation, but not amounting to material irregularity, is not a negation of rule of law, but part of it. Being a procedural law, the CIRP Regulations are but facilitatory provisions through which accomplishing, inter alia the statutory objective of value maximization of the CD is conceived. They principally aim to provide clarity, consistency and transparency for ensuring optimum fairness in the resolution process and also insulating it from any temptations eroding the ethical fidelity (defined by non-arbitrariness or subjectivity or personal preferences) associated with their respective duties. In other words what ought to be the norm of self- discipline for the RP or the CoC is given a statutory status through the Regulations. he working of the Regulation may not lead to a situation where the Regulation triumphs and the Code prostrates. A case of missing the wood for the tree. It would therefore, be a plain disservice to the Code and what it aims to achieve, if the alleged violation of few Regulations were to be termed as constituting material irregularity. Hence, this tribunal holds that a case of material irregularity has not been made out. Turning to the appellant case, they accused that Krishna, having obtained back its EMD after being informed of the approval of Dorni’s plan, does not have locus standi to challenge the approval, and this argument is not without merit, but inasmuch as they have been heard and the issue on the principal plea of material irregularity having been decided, it does not deserve greater probe. Another argument advanced was that both Yanna and Krishna did not challenge the CoC’s approval immediately but only after couple of months, and hence their intent to object lacks bonafide. If indeed in a given case the procedure adopted by RP and CoC is tainted in material irregularity, mere delay in bringing it to the notice of the Tribunal should not matter. The order of the Adjudicating Authority is set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an Adjudicating Authority's order condoning delayed filing of an Expression of Interest (EoI) can validate the belated participation of a prospective resolution applicant and the subsequent actions of the Resolution Professional (RP) and Committee of Creditors (CoC). 2. Whether reception of a belated EoI and subsequent steps that omit the provisional/final PRA listing procedure prescribed by the CIRP Regulations constitute a material irregularity vitiating the resolution process. 3. Whether alleged concealment of a belated entrant and asserted collusion between RP, CoC and the entrant are established facts sufficient to nullify the approved resolution plan. 4. Whether late deposit of Earnest Money Deposit (EMD) accompanying a resolution plan, and CoC's condonation thereof, renders the process infirm. 5. Whether failure of unsuccessful resolution applicants to challenge the Adjudicating Authority's condonation order at the earliest stage or their conduct (receipt of communications, improvement opportunities, refund of EMD) estops them from contesting the approval on grounds of material irregularity. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal character and effect of Adjudicating Authority's condonation order permitting belated EoI Legal framework: Adjudicating Authority possesses inherent and statutory powers to condone delay under court rules; Regulations 36A and related provisions govern EoI timelines and procedure for provisional/final PRA lists. Precedent Treatment: Authorities cited establish that the Adjudicating Authority has power to pass such orders and that RP/CoC are not bound to disregard an order of the Adjudicating Authority; prior ratios on whether a fresh Form-G is mandatory for a late entrant are discussed by parties. Interpretation and reasoning: The Court reads the condonation order as having (i) allowed EoI filing within the existing timeline for submission of plans without relaxing the substantive conditions, and (ii) expressly directing that consideration be 'strictly in accordance with law.' The order therefore did not license blanket non-compliance with Regulations but did validly permit the entrant to participate subject to compliance and CoC evaluation. Ratio vs. Obiter: Ratio - an Adjudicating Authority's condonation of delay, when unchallenged, provides a legitimate basis for RP/CoC to receive/consider a belated EoI subject to compliance with eligibility and substantive requirements; Obiter - commentary on limits of review powers of Adjudicating Authority in other contexts. Conclusion: The condonation order, neither assailed nor held void at the time, legitimately enabled reception of the EoI and downstream action by RP/CoC; the order's riders preserved the requirement of lawful consideration. Issue 2 - Whether statutory violations (Regulations 36A, 36B, 39 etc.) amounted to material irregularity Legal framework: CIRP Regulations are procedural/delegated legislation designed to secure fairness, transparency and value maximization; concept of 'material irregularity' requires an impact assessment of any breach on fairness/integrity of the resolution process. Precedent Treatment: The Court relies on Tribunal and Supreme Court principles distinguishing directory versus mandatory compliance and on prior articulation of material irregularity as requiring substantial impact on outcome; cases showing procedural non-compliance are not automatically fatal absent material prejudice. Interpretation and reasoning: The Court conducts an impact assessment rather than treating each regulatory breach as ipso facto voiding the process. It finds that (a) the condonation did not relax pre-qualification conditions; (b) the belated EoI was accepted pursuant to the Adjudicating Authority's order and the entrant submitted its plan on the last date; (c) there is no evidence the entrant lacked eligibility or had any unmerited advantage; (d) unsuccessful applicants were later afforded opportunities to improve their plans and did so; and (e) the late EMD was accepted/condoned by the CoC within its power under Regulation 36B(4A). Ratio vs. Obiter: Ratio - breach of CIRP Regulations will invalidate a resolution only if it causes material irregularity, i.e., a substantial impact on fairness, integrity, or outcome; Obiter - extended commentary on purpose of Regulations as facilitatory and the need for contextual application. Conclusion: The specific regulatory deviations identified did not produce material irregularity in the circumstances; therefore the CoC's consideration and approval of the plan were not vitiated on that ground. Issue 3 - Allegation of collusion and concealment between RP, CoC and entrant Legal framework: Fraud or collusion must be inferred from cogent facts and circumstances; mere irregular acts or ordinary human conduct do not establish collusion. Precedent Treatment: Principles requiring clear, demonstrable evidence to infer collusion; mere suspicion or fortuitous sequence of events insufficient. Interpretation and reasoning: The Court finds an absence of probative material demonstrating dishonest motive or clandestine deal-making: RP acted pursuant to an NCLT order; unsolicited advice to approach the Adjudicating Authority is benign; conduct such as requesting improvements of competing plans and communications (signatures on sealed covers, emails) indicate no deliberate concealment designed to prejudice other PRAs. Ratio vs. Obiter: Ratio - collusion is not established where acts are explicable by lawful orders, ordinary conduct, or legitimate commercial choices and no specific evidence of dishonest concert is shown; Obiter - observations on RP's human conduct and expectations of disclosure duties. Conclusion: Allegation of collusion and concealment is not established on the record and does not impugn the approval. Issue 4 - Effect of late deposit of EMD and CoC's power to condone Legal framework: Regulation 36B(4)/(4A) contemplates EMD deposit; CoC has authority to determine EMD timelines and to condone delays within its discretion. Precedent Treatment: Authorities recognize CoC's role in assessing commercial matters and condoning procedural lapses where not affecting integrity of process. Interpretation and reasoning: The entrant's EMD was deposited after public holidays; CoC condoned the delay. There is no proof that the late deposit conferred unfair advantage or altered comparative evaluation; the power to condone lies with CoC and the judicial role is limited to impact assessment. Ratio vs. Obiter: Ratio - late EMD deposit condoned by CoC does not per se invalidate approval absent material prejudice; Obiter - remarks on NEFT/technical possibilities not determinative of substantive impact. Conclusion: Late EMD deposit, condoned by CoC, did not amount to material irregularity in the circumstances. Issue 5 - Locus, delay and estoppel of unsuccessful applicants Legal framework: Parties challenging procedural acts must show substantive prejudice; estoppel/acquiescence may be considered but do not bar challenge to material illegality; timing and conduct bear on bona fides and prejudice. Precedent Treatment: Courts may entertain delayed challenges where material irregularity is alleged; conversely, failure to act when informed and conduct such as accepting EMD refund may weaken challenge. Interpretation and reasoning: The Court notes unsuccessful applicants did not immediately challenge the condonation order or approval; evidence suggests they were aware (or should have been aware) of entrant's participation (signatures, emails, post-opening communications), and they were given opportunities to improve bids. While delay does not necessarily estop a valid challenge to material irregularity, here the absence of material prejudice and indicia of acquiescence undermine their claims. Ratio vs. Obiter: Ratio - absence of prompt challenge and conduct consistent with participation/acquiescence weigh against overturning a plan absent material irregularity; Obiter - commentary that delay alone does not cure a material illegality. Conclusion: The unsuccessful applicants' delay and conduct do not bar the Tribunal from deciding the merits but support refusal to set aside the approved plan where no material irregularity is made out. FINAL CONCLUSION The Tribunal holds that (a) the Adjudicating Authority's condonation order legitimately permitted the belated EoI subject to lawful consideration; (b) the identified breaches of CIRP Regulations did not cause material irregularity in the facts, impact or outcome of the process; (c) allegations of collusion are unproven; (d) the late EMD deposit condoned by the CoC did not vitiate the approval; and (e) therefore the Adjudicating Authority's order setting aside the CoC approval is set aside and the approval is to be revived for further adjudication under the relevant section for sanction of the resolution plan.