2025 (11) TMI 1804 - AT - IBC

NCLAT confirms unencumbered asset sales must comply with Regulation 29 of CIRP Regulations 2016; appeal dismissed

National Asset Reconstruction Company Ltd., (Trustee of NARCL Trust-0025) Versus Sunil Kumar Sharma, Suspended Director of Jaiprakash Associates Ltd.

The NCLAT upheld the order of the Adjudicating Authority (NCLT), holding that any sale of the corporate debtor's unencumbered assets must strictly follow ... Validity of participating in the meeting of the CoC at any date after execution of the assignment deed - Violation of Regulation 28 of the CIRP Regulations - Failure of the Resolution Professional to adhere to the statutory framework governing the resolution process - HELD THAT:- The Adjudicating Authority in detail has considered the entire process and the decision taken in the 11th CoC meeting. The Regulation 29 of CIRP Regulation 2016 clearly envisaged the sale of the unencumbered assets on fulfilling the conditions as provided in the Regulation. The statutory process thus has to in accordance with the Regulation 29. The solution is that the process was initiated, only for price discovery, and not for the sale does not appeal to us, as when the investment is encumbered, even the price discovery may not be optimum and once the investments are encumbrance free, there is possibility of a better price discovery. Hence, the steps taken by the appellant for price discovery is not commensurate with the objective of maximizing the value of the assets of the CD. The Adjudicating Authority by the impugned order has clearly permitted the sale after removing the encumbrancy and meeting the requirement of Regulation 29 of CIRP Regulation 2016. The Appellant in no manner is inhibited to take steps in accordance with the Regulation 29 of CIRP Regulation 2016, which involves mechanism of price discovery before actual sale. The decision taken by the Adjudicating Authority protect the interest of both the parties and there are no ground to interfere in exercise of Appellate jurisdiction - Appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether a delay of 10 days in filing the appeal deserved condonation based on the reasons pleaded. 1.2 Whether participation of an assignee financial creditor in the Committee of Creditors' meetings after execution of the assignment deed, without prior compliance with Regulation 28 of the CIRP Regulations, was valid. 1.3 Whether the Committee of Creditors' decision in its 10th and 11th meetings, particularly Agenda Item No. 3 of the 11th meeting, to initiate a process of inviting Expressions of Interest (EOI) for price discovery and/or sale of the corporate debtor's investments in specified companies was in conformity with Regulation 29 of the CIRP Regulations, 2016, especially in relation to encumbered assets. 1.4 Whether the Appellate Tribunal should interfere with the Adjudicating Authority's directions limiting use of the EOI mechanism to unencumbered assets and requiring removal of encumbrances before proceeding under Regulation 29. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Condonation of 10 days' delay in filing appeal Interpretation and reasoning 2.1.1 The Tribunal noted the explanation that the matter involved extensive documentation pertaining to the Corporate Insolvency Resolution Process of the corporate debtor and that time was consumed in compilation, collation, verification and systematic arrangement of voluminous documents. 2.1.2 The Tribunal accepted this as a sufficient cause for not filing the appeal within the prescribed time. Conclusions 2.1.3 The delay of 10 days in filing the appeal was condoned. 2.2 Validity of participation of assignee creditor in CoC meetings vis-à-vis Regulation 28 of CIRP Regulations Legal framework (as discussed) 2.2.1 Regulation 28 of the CIRP Regulations was considered by the Adjudicating Authority and treated as procedural in nature, imposing compliance obligations on the Resolution Professional in the context of assignment of debt and corresponding change in the composition of the Committee of Creditors. Interpretation and reasoning 2.2.2 The Adjudicating Authority held that it was valid for the assignee (Respondent No. 2-NARCL) to participate in the CoC meeting on any date after execution of the assignment deed. 2.2.3 Regulation 28 was held to be only procedural, to be complied with by the Resolution Professional, and it was recorded that such compliance had subsequently been effected by him. 2.2.4 On this basis, the relief sought for quashing the minutes of the 10th and 11th CoC meetings on the ground of violation of Regulation 28 was declined. Conclusions 2.2.5 The Tribunal, noting the findings of the Adjudicating Authority, did not interfere; participation of the assignee creditor in the CoC after execution of the assignment deed was upheld as valid, and no relief was granted on alleged non-compliance with Regulation 28. 2.3 Legality of CoC decision to invite EOI for price discovery and/or sale of investments under Regulation 29, particularly where assets are encumbered Legal framework (as discussed) 2.3.1 Regulation 29 of the CIRP Regulations, 2016 was examined as the relevant provision governing sale of assets of the corporate debtor by inviting Expressions of Interest. 2.3.2 The Adjudicating Authority and the Appellate Tribunal recorded that Regulation 29 envisages sale of unencumbered assets only, by issuing an Expression of Interest, subject to satisfaction of prescribed conditions. Interpretation and reasoning 2.3.3 The Adjudicating Authority held that there is no stipulation under Regulation 29 permitting a process 'only for price discovery'; resorting to EOI merely for price discovery, independent of a sale process conforming to Regulation 29, was not contemplated. 2.3.4 The Adjudicating Authority set aside the minutes of the 11th CoC meeting resolving to start the bidding process for issuance of EOI 'for price discovery' of the corporate debtor's investments in JPVL and JFIL to the extent such process was confined solely to price discovery without a Regulation 29-compliant sale. 2.3.5 It was specifically held that the investment in the shares of JPVL constituted an encumbered asset (save and except 4.99% of the total holding). Therefore, it did not qualify as an 'unencumbered asset' under Regulation 29 and could be sold under that Regulation only after removing the encumbrance and satisfying the requirements of Regulation 29. 2.3.6 As regards the asset relating to JFIL, it was held to be unencumbered. Therefore, the process for sale could be continued and completed by inviting EOI strictly in accordance with Regulation 29, but the use of the mechanism only for price discovery was not permissible under the Regulation. 2.3.7 Before the Appellate Tribunal, the appellant contended that the 11th CoC meeting decision was intended only for price discovery, with sale to be effected only after release of encumbrances, and thus did not violate the Code or Regulations. 2.3.8 The Appellate Tribunal expressly rejected the contention that initiating a process solely for price discovery of encumbered investments was acceptable. It reasoned that where the investment is encumbered, price discovery may not be optimum, and once investments are encumbrance-free, there is a possibility of better price discovery. Therefore, steps for price discovery in respect of encumbered investments were held not commensurate with the objective of maximizing the value of the assets of the corporate debtor. 2.3.9 The Appellate Tribunal noted that the Adjudicating Authority's order clearly permitted sale of the corporate debtor's investment in JPVL after removal of encumbrances and compliance with Regulation 29, and permitted continuation of the process for JFIL (being unencumbered), but disallowed a standalone price discovery exercise not contemplated by Regulation 29. Conclusions 2.3.10 The CoC's decision, as recorded in the 11th meeting, to use an EOI process merely for price discovery under Regulation 29 was held to be invalid to that extent. 2.3.11 Sale of encumbered investments (such as the encumbered portion of JPVL shares) may be undertaken under Regulation 29 only after encumbrances are removed and all requirements of that Regulation are met. 2.3.12 For unencumbered assets (such as the JFIL-related investment), sale through EOI in accordance with Regulation 29 is permissible, but not a process limited to price discovery alone. 2.4 Scope of appellate interference with Adjudicating Authority's directions and protection of parties' interests Interpretation and reasoning 2.4.1 The Appellate Tribunal observed that the Adjudicating Authority had examined in detail the entire process and decisions taken in the 11th CoC meeting and had structured its directions in conformity with Regulation 29 and the objective of value maximization. 2.4.2 It noted that paragraph 88(ii)(b) of the impugned order explicitly permitted the sale of investment in JPVL after removal of encumbrances and compliance with Regulation 29, thereby not inhibiting the appellant from proceeding lawfully. 2.4.3 The Tribunal held that the statutory process under Regulation 29 must be followed and that the mechanism of price discovery is embedded within the Regulation 29 sale process, to be undertaken after the asset is made unencumbered. 2.4.4 The Tribunal concluded that the directions of the Adjudicating Authority adequately protected the interests of both sides and did not warrant interference in appellate jurisdiction. Conclusions 2.4.5 The appeal against the Adjudicating Authority's order was dismissed. 2.4.6 It was clarified that the impugned order does not inhibit the appellant from proceeding in accordance with Regulation 29 of the CIRP Regulations, 2016, including undertaking lawful price discovery as part of a Regulation 29-compliant sale process after removal of encumbrances where required.