2026 (2) TMI 610 - AT - IBC

Resolution applicant as operational creditor voting on its own plan found void; approval set aside and liquidation ordered.

Section 30(5) bars a resolution applicant who is not a financial creditor from voting at the CoC; where a sole-member CoC that was an operational creditor ... Operational Creditor - Corporate Insolvency Resolution Process - Conflict of interest - conduct of the Committee of Creditors​​​​​​​ - Section 30(5) of the Insolvency and Bankruptcy Code - commercial wisdom of the Committee of Creditors - maxim nemo judex in causa sua - material irregularity vitiating approval - principles of natural justice - maximisation of value under the Insolvency and Bankruptcy Code - role and duties of the Resolution Professional as institutional safeguard - HELD THAT:- In the present case the Resolution Applicant is an Operational Creditor and not a Financial Creditor. In such a situation it is clearly barred, from voting on its own Resolution Plan, submitted for resolution of Corporate Debtor. Such voting and approval of its own Resolution Plan by the Operational Creditor is in the face of express bar provided in Section 30(5) of the Code. The question of commercial wisdom of Committee of Creditors is meaningless in this situation, as the resolution plan approval by the CoC comprising of Resolution Applicant, who is also an OC is in express violation of Section 30(5) of the Code, and such approval of CoC is void-ab-initio. Thus, we hold that the conduct of the Committee of Creditors in the present case is in clear violation of Section 30(5) of the Insolvency and Bankruptcy Code. The said provision expressly prohibits the Resolution Applicant, who is not a Financial Creditor from voting on its resolution plan in the meeting of Committee of Creditors. In the present case, the sole Operational Creditor acted as a Resolution Applicant and, at the same time, exercised 100% voting rights to approve its own Resolution Plan. Such conduct is in face of the statutory bar provided by Section 30(5) of Code. Permitting a Resolution Applicant, who is not a Financial Creditor, to effectively vote on and approve its own Resolution Plan amounts to a material irregularity in the decision-making process. Accordingly, Issue No. 1 is answered in negative. We note from the minutes of the 6th meeting of the Committee of Creditors that the Resolution Professional placed on record the stark difference between the competing Resolution Plans. The Resolution Professional specifically informed the CoC that the Resolution Plan submitted by Respondent No.1 (Mahaveer Medicare) was of a value of Rs. 1 Lakh, whereas the Resolution Plan submitted by the Appellant, M/s Pragiti Constructions, was of a value of Rs. 20 Lakhs, out of which Rs. 10 Lakhs was proposed to be distributed to the operational creditor. The Resolution Professional further pointed out that the offer of Rs. 20 Lakhs was only an initial offer and that, if the Appellant’s Resolution Plan was taken up for review and competition, the value could be increased. It was also suggested by the Resolution Professional that consideration of the Appellant’s Resolution Plan would create a healthy competitive process. The maxim nemo judex in causa sua, that no person can be a judge in his own case, is not a mere technical rule but a foundational principle intended to preserve the integrity of adjudicatory and decision-making processes. When the same entity proposes a Resolution Plan, evaluates competing plans, rejects them, and finally approves its own plan, the process ceases to be fair, impartial, or credible. Even if actual mala fides are not expressly proved, the existence of a real likelihood of bias is sufficient to vitiate the process. Justice must not only be done but must also appear to have been done. We are satisfied that the rejection of the Appellant’s Resolution Plan is vitiated by material irregularity, violation of principles of natural justice, and non-compliance with binding judicial directions. Accordingly, we hold that the decision of CoC which comprised of a Resolution Applicant who was also an Operational Creditor and had 100% voting rights in CoC on the resolution plan of the appellant was vitiated by material irregularity. A single member of CoC who is also a Resolution Applicant would always have conflict of interest vis-a-vis another Resolution Applicant and his decision in such cases would be in violation of principles of natural justice. The second issue is decided accordingly. The Resolution Professional plays a pivotal role in proceedings under the Code. It is expected that RP would conduct the CIRP proceedings in accordance with the provisions of the Code including the Rules and Regulations thereunder. It was the duty of RP to highlight the provisions of Section 30(5) to the notice of Operational Creditor and the Adjudicating Authority. Had it been done on time, this proceeding would not have wasted so much of time and resources of NCLT and this Appellate Tribunal. A RP is supposed to be well versed in the relevant legal provisions of the Code. His failure to take note of Section 30(5) of the Code is viewed seriously. The matter is brought to the notice of IBBI for appropriate action against the RP. IBBI is further directed to take note of peculiar legal situation of the present case and initiate necessary amendments to the Insolvency and Bankruptcy Code. Adjudicating Authority correctly referred the resolution plan of appellant to the CoC vide its direction dated 10.09.2024, but it did not address the concerns arising from non-compliance with its directions i.e. whether the RP and CoC while evaluating the resolution plan of the appellant abided by the principles of natural justice and provisions of the Code. In our considered view, where the statutory framework is silent and a clear conflict of interest emerges, both the Resolution Professional and the Adjudicating Authority are required to act as institutional safeguards to prevent abuse of the process. Their failure to do so in the present case has materially affected the resolution process. We note that peculiar situation in the present case reflects a legislative vacuum, wherein the IBC which is a complete Code and provides legal mechanism for CIRP in all types of cases cannot throw light about the manner in which this type of case is to be resolved. As we have already held that the resolution plan suffers from material irregularity and is in express violation of Section 30(5) of the Code. The resolution of the Corporate Debtor is not possible within the current legislative framework and liquidation is the only solution in this case. Issues: (i) Whether a Resolution Applicant who is an Operational Creditor and the sole member of the Committee of Creditors (holding 100% voting rights) can vote to approve its own resolution plan; (ii) Whether a single-member Committee of Creditors that is also a competing Resolution Applicant can fairly, objectively and independently assess and reject a competing resolution plan, particularly where a judicial direction required fresh consideration.Issue (i): Whether an Operational Creditor, who is not a Financial Creditor, acting as a Resolution Applicant and sole voting member of the CoC can validly vote to approve its own resolution plan.Analysis: Section 30(5) of the Insolvency and Bankruptcy Code, 2016 contains a proviso that a resolution applicant shall not have a right to vote at the CoC meeting unless such resolution applicant is also a financial creditor. The statutory scheme thus separates the role of a resolution applicant from the role of a voting decision-maker to prevent influence and conflict. In the factual matrix where the sole CoC member was an Operational Creditor who also submitted and approved its own plan, the statutory prohibition in Section 30(5) was breached. Such voting and approval by an Operational Creditor who is not a Financial Creditor directly defeats the purpose of the proviso and creates a material irregularity in the decision-making process.Conclusion: Issue (i) answered in the negative. Approval of its own resolution plan by an Operational Creditor who is not a Financial Creditor and who held 100% voting rights in the CoC is void-ab-initio and amounts to a material irregularity.Issue (ii): Whether the single-member CoC that was also a competing Resolution Applicant conducted a fair, objective and independent assessment of the competing resolution plans when the Adjudicating Authority had directed fresh consideration.Analysis: The Adjudicating Authority directed the CoC to freshly consider the appellant's plan keeping relevant parameters including total plan value in view. The minutes of the 6th CoC meeting, however, show absence of an evaluation matrix, lack of comparative financial analysis, failure to invite the appellant to the meeting, non-sharing of relevant material (including PUFE information), and predetermined rejection based on internal discussion. The stark disparity in plan values (appellant's plan being significantly higher) heightened the obligation on the CoC and RP to undertake a structured, transparent comparative evaluation. The single-member CoC's rejection without meaningful evaluation, and the RP's failure to ensure compliance with Regulation 39 and the AA direction, constitute procedural infirmity, denial of a meaningful opportunity, and violation of principles of natural justice.Conclusion: Issue (ii) answered against the CoC and RP. The decision-making process was vitiated by material irregularity, conflict of interest and denial of natural justice; the CoC's approval cannot be sustained.Final Conclusion: The impugned orders approving the resolution plan of the sole CoC member and rejecting the appellant's plan are set aside due to material irregularity and violation of Section 30(5) and principles of natural justice; the Corporate Insolvency Resolution Process cannot be continued within the present framework and the Corporate Debtor is ordered to be liquidated.Ratio Decidendi: Section 30(5) of the Insolvency and Bankruptcy Code, 2016 prohibits a resolution applicant who is not a financial creditor from voting at the CoC meeting; where a sole CoC member who is an operational creditor votes to approve its own plan and the process lacks a structured, transparent comparative evaluation and compliance with judicial directions, the approval is void-ab-initio and constitutes a material irregularity justifying judicial intervention including setting aside the approval.