TaxTMI 
TaxTMI 
2019 (5) TMI 481
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....gs were initiated by the filing of an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("the Code") by the financial creditor State Bank of India ("SBI") which was admitted vide order dated 30.08.2017 where Mr. Anil Katia was appointed as the interim resolution professional, who also continues to be the resolution professional ("RP") presently in this matter. 3. The RP has submitted the progress reports from time-to-time and the meetings of the committee of creditors ("CoC") were held as prescribed under the Code. On 20.12.2017 an Expression of Interest ("EOI) for inviting resolution plans for the Corporate Debtor ("CD") was published in Business Standard but no response to the EOI was received. A second EOI was published on 11.01.2018 in response to which interest was shown by four prospective applicants. The CoC further decided to reduce the net worth eligibility criteria for submitting resolution plans from Rs. 10 crores to Rs. 4 crores and thus, a third EOI was published. Ultimately from the four prospective applicants only two applicants - Shri Nanak Singh and Shri Rajinder Singh Sandhu - were found eligible to submit resolution plans. However, Shri N....
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.... resolution process costs in a manner specified by the Board in priority to the payment of other debts of the corporate debtor; (b) provides for the payment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53; (c) provides for the management of the affairs of the Corporate debtor after approval of the resolution plan; (d) The implementation and supervision of the resolution plan; (e) does not contravene any of the provisions of the law for the time being in force (f) confirms to such other requirements as may be specified by the Board." 7. An overview of the ingredients of the resolution plan and its compliance/non-compliance with the ingredients specified in Section 30 of the Code and attendant regulations is mentioned below: Condition Compliance under Resolution Plan S. 30(1) - resolution applicant submits affidavit stating that he is eligible under Section 29A The resolution applicant has submitted an affidavit to this effect but as discu....
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....his Tribunal. Rs. 1.94 crores with interest will be paid by way of release of FDR lying with Hon'ble MPID Court and if the FDR is not released then the RA will pay the amount at the end of 2 years by way of bullet payment. The balance of Rs. 8.06 crores will be paid after detachment of properties from Hon'ble MPID Court and ED or order of the Hon'ble NCLT, whichever is later. Thus, the payment of the amount to SBI is conditional on detachment of the concerned properties. c. Operational creditors including the trade creditors but excluding related party creditors and NSEL will be paid on pro rata basis on receipt of respective claims and verification thereof by the RA, at the rate of 30% of the claimed amount within the maximum period of two years from the date of approval of plan by this Tribunal and remaining liability will be written off. All claims even those rejected, if substantiated along with the one not considered by the resolution professional will be treated at par with operational creditors who have not filed claims and will be entitled for pro rata amount. No amount against the admitted amount of Rs. 51.02 crores will be paid to NSEL. d. ....
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....l creditor. However, as discussed in paragraphs 20-24 the procedure undertaken to vote on the resolution plan was irregular. Eligibility of Resolution Applicant 8. It is pertinent to note that one of the conditions which is required to be satisfied and as provided in clause (e) of sub-section (2) of Section 30 is that the resolution plan does not contravene any of the provisions of the law for the time being in force, which obviously will include the provisions of the Code as well and more specifically Section 29A of the Code. Thus, first a reference is required to be made to Section 29A of the Code which states who is ineligible to be a resolution applicant: "29A. Persons not eligible to be resolution applicant - A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person- (a) is an undischarged insolvent; (b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949); (c) at the time of submission of the resolution plan has an account, or an account of a corporat....
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.... Provided further that this clause shall not apply in relation to a connected person referred to in clause (iii) of Explanation I; (e) is disqualified to act as a director under the Companies Act, 2013 (18 of 2013): Provided that this clause shall not apply in relation to a connected person referred to in clause (iii) of Explanation I; (f) is prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets; (g) has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code: Provided that this clause shall not apply if a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan approved by a fina....
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.... International Organisation of Securities Commissions Multilateral Memorandum of Understanding; (c) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor, where the terms shall have the meaning assigned to them in regulation 2 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 made under the Foreign Exchange Management Act, 1999 (42 of 1999); (d) an asset reconstruction company register with the Reserve Bank of India under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002); (e) an Alternate Investment Fund registered with Securities and Exchange Board of India; (f) such categories of persons as may be notified by the Central Government." 9. The extract above is how Section 29A stands presently after it was last amended with effect from 06.06.2018. The ineligibility under this section applies not only to the resolution applicant but also to persons 'acting jointly or in concert' with the resolution appl....
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...., of the immediate relative of such individual: Provided that this sub-clause shall not apply to a bank whose sole role is that of providing normal commercial banking services or activities in relation to an open offer under these regulations; (xiii) an investment company or fund and any person who has an interest in such investment company or fund as a shareholder or unitholder having not less than 10 per cent of the paid-up capital of the investment company or unit capital of the fund, and any other investment company or fund in which such person or his associate holds not less than 10 per cent of the paid-up capital of that investment company or unit capital of that fund: Provided that nothing contained in this sub-clause shall apply to holding of units of mutual funds registered with the Board; Explanation.- For the purposes of this clause - "associate " of a person means,- (a) any immediate relative of such person; (b) trusts of which such person or his immediate relative is a trustee; (c) partnership firm in which such person or his immediate relative is a partner; and (d) members of Hindu undivided famil....
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....nto two groups, as a perusal of sub-clauses (c) and (g) of Section 29A shows. If a person has been a promoter, or in the management, or control, of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place, and in respect of which an order has been made by the Adjudicating Authority under the Code, such person is ineligible to present a resolution plan under Section 29A(g). This ineligibility cannot be cured by paying off the debts of the corporate debtor. Therefore, it is only such persons who do not fall foul of sub-clause (g), who are eligible to submit resolution plans under sub-clause (c) of Section 29A, if they happen to be persons who were in the erstwhile management or control of the corporate debtor. 57. It is important for the competent authority to see that persons, who are otherwise ineligible and hit by sub-clause (c), do not wriggle out of the proviso to sub-clause (c) by other means, so as to avoid the consequences of the proviso. For this purpose, despite the fact that the relevant time for the ineligibility under sub-clause (c) to attach is the time of submissi....
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....the importance of ensuring equitable treatment to similarly placed creditors and states as follows: "Ensuring equitable treatment of similarly situated creditors 7. The objective of equitable treatment is based on the notion that, in collective proceedings, creditors with similar legal rights should be treated fairly, receiving a distribution on their claim in accordance with their relative ranking and interests. This key objective recognizes that all creditors do not need to be treated identically, but in a manner that reflects the different bargains they have struck with the debtor. This is less relevant as a defining factor where there is no specific debt contract with the debtor, such as in the case of 95 damage claimants (e.g. for environmental damage) and tax authorities. Even though the principle of equitable treatment may be modified by social policy on priorities and give way to the prerogatives pertaining to holders of claims or interests that arise, for example, by operation of law, it retains its significance by 12 UNCITRAL Legislative Guide on Insolvency Law ensuring that the priority accorded to the claims of a similar class affects all members of th....
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.... with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor, xxx xxx xxx" 47. The aforesaid Regulation further strengthens the rights of operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors ' rights, together with priority in payment over financial creditors."' 14. It is clear from the perusal of the above stated order of the Hon'ble Supreme Court that the resolution plan has to be equitable to all the creditors. It is also relevant to note that the Hon'ble NCLAT in its order Binani Industries v. Bank of Baroda dated 12.09.2018 held that Regulation 38(l)(b) and (c) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) Regulations, 2016 ("CIRP Regulations") is inconsistent with the Code and should not be taken into consideration and any resolution plan discriminating between two sets of creditors on the basis of such regulations cannot be approved. Subsequently, vide amendment dated 05.10.2018 the Insolvency and Bankruptcy Board of India amended Regulation 38(1) which now only state....
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....ay (annexed to C.A. 174/ND/2018) it can be seen that the list in the resolution plan includes individual properties owned by the outgoing promotors/guarantors of the CD, which have been attached by the Hon'ble High Court of Bombay. Further, the RA at page 38 of the resolution plan has prayed that the personal properties of the promotors/directors/guarantors of the CD mentioned in the resolution plan be handed over to the CD free from any encumbrances of any sort by any statutory authority or any government body/agency or by virtue of any direction of any other court of law including that of Hon'ble MPiD Court, EOW and ED against pre-CIRP liabilities. Further, on page 47 of the resolution plan it is stated that the resolution plan is conditional on release of CD and other properties sought to be acquired under the resolution plan, which are held in the personal names of outgoing promoters/guarantors, from Hon'ble MPID court and ED through PMLA court and in case of non-release of properties the plan will stand withdrawn. It is not difficult to see that this relief prayed for by the RA is only a ruse to liberate the promoters' properties from the attachments they are s....
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.... effective, it is dangerous to encourage a situation where the RA makes his resolution plan conditional on the satisfaction of reliefs which are unreasonable or beyond the scope of the Adjudicating Authority or have been made in bad faith. In fact, such a condition raises doubts regarding the effective implementation of the resolution plan regarding which the Adjudicating Authority has to satisfy itself according to Section 31 of the Code. The RA has stated in the resolution plan that the acquisition of the properties of the promoters/guarantors of the CD is integral for the revival of the CD and for a workable resolution plan as the lands beneath the buildings of CD are in the individual names of the promoters/guarantors. It should be kept in mind that the CIRP is primarily a process to explore the possibility of reviving a company, give the prospective applicants an opportunity to present their plans of revival and to select a plan for implementation if the plan is found feasible and in compliance with all applicable laws. If it so happens that a company cannot be revived because any integral part/asset of the company is irretrievably blocked, then the company has to go into liqu....
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....Regulation 39(3) of the CIRP Regulations which reads as follows: "(3) The committee may approve, any resolution plan with such modifications as it deems fit. " 22. The above regulation does not give room for CoC to pass a conditional approval but only means that the CoC can approve resolution plans which include such modifications to the original plan as the CoC deems fit. Thus, the approval given on the 9th meeting is a conditional approval given to a resolution plan which was not in its final form but still under discussions. The final form was received by the RP on 26.05.2018 which the RP forwarded to SBI, which then gave its oral confirmation to the resolution plan. There are several material irregularities in this procedure followed by the RP. First, the RP bypassed the procedure of calling a meeting to discuss the resolution plan in its final form, in which NSEL would have also been a participant according to Section 24(3)(c) of the Code. The Hon'ble Supreme Court in its recent decision Vijay Kumar v. Standard Chartered Bank & Ors.has strongly emphasized the importance of the role of the participants of the CoC meetings in the following words "This st....
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.... a completely new approach has been adopted for speeding up the recovery of the debt due from the defaulting companies. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory. In the earlier regime, the corporate debtor could indefinitely continue to enjoy the protection given Under Section 22 of Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken... *** 60. In the first place, amendment to Regulation cannot have retrospective effect so as to impact the decision of the CoC of the concerned corporate debtor - taken before the amendment of the said Regulation. There is no indication in the Code as amended or the Regulations to suggest that as a consequence of this amendment the decisions already taken by the concerned CoC prior to 3rd July, 2018 be treated as deemed to have been vitiated or for that matter, necessitating reversion of the proposal to CoC for recording reasons, that too beyond the statutory period of 270 days. A new life cannot be infused in the reso....