AI Drafter 
TaxTMI 
TaxTMI 
2020 (3) TMI 1320
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....To pass appropriate orders dispensing with holding of any meetings of unsecured creditors and meeting of shareholders for the approval of the scheme. (b) To approve either scheme A submitted by M/s. Seshasayee Paper and Board Ltd., or scheme B submitted by M/s. Sun Paper Mill Ltd., in the interest of the justice. (c) In the event honourable Tribunal approves scheme B, direct the scheme applicant, viz., M/s. Sun Paper Mill Ltd., to pay the liquidation costs of full sum of Rs. 2,73,30,264 in modification of liquidation cost offered in scheme B as approved by the CoC and thus render jus tice. (d) To provide any other relief which may be found suitable to facilitate the liquidator to discharge his function effectively and such further orders be passed or directions be given as your Lordships may deem fit and proper." Brief facts which are relevant for the consideration of this application are as follows : 1. Based on a petition moved by one of the operational creditors of the company in liquidation against the corporate debtor under the Insolvency and Bankruptcy Code, 2016 (hereinafter simply referred to as IBC, 2016 or the Code) this Bench of the....
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.... P. Ltd. v. Union of India [2019] 213 Comp Cas 198 (SC), we direct the "liquidator" to proceed in accordance with law. He will verify claims of all the creditors ; take into custody and control of all the assets, property, effects and actionable claims of the "corporate debtor", carry on the business of the "corporate debtor" for its beneficial liquidation, etc., as prescribed under section 35 of the I and B Code. The liquidator will access information under section 33 and will con solidate the claim under section 38 and after verification of claim in terms of section 39 will either admit or reject the claim, as required under section 40. Before taking steps to sell the assets of the "corporate debtor(s)" (companies herein), the liquidator will take steps in terms of section 230 of the Companies Act, 2013. The Adju dicating Authority, if so required, will pass appropriate order. Only on failure of revival, the Adjudicating Authority and the liquidator will first proceed with the sale of company's assets wholly and thereafter, if not possible to sell the company in part and in accordance with law'." 4. Going further, the hon'ble National Company Law Appellat....
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....angement by making proposal of payment to all the creditor(s), the liquidator on behalf of the company will move an application under section 230 of the Companies Act, 2013 before the Adjudicating Authority, i. e., National Company Law Tribunal, Chennai Bench, in terms of the observations as made in above. On failure, as observed above, steps should be taken for outright sale of the 'corporate debtor' so as to enable the employees to continue." 5. With a view to give effect to the order of the hon'ble National Company Law Appellate Tribunal, the applicant submits that advertisements were issued by him in the newspapers Business Standard and Malai Murasu calling for expression of interest (EoI) for the submissions of a scheme and pursuant to the same two schemes came to be propounded by two scheme Applicants, namely, M/s. Seshasayee Paper and Boards Ltd. (for brevity called hereinafter as "SPBL" or "SPB" as the case may be), the fifth respondent herein and the said scheme of SPBL designated for ease of reference as scheme A by the applicant/liquidator and the other one by M/s. Sun Paper Mill Ltd. (for brevity called hereinafter as "SPML" or "SPM" as the case may be), ....
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....iginal scheme propounded respectively by them, which modifications were also duly circulated to the members of the CoC by the applicant and asking them to come forward with their final opinion. The individual opinions forwarded as their response it is seen has been extracted in detail by the applicant in the application which may not be material for being reproduced in entirety for sake of brevity, however, at the same time, observing the fact that after the above exercise, the members of the CoC had once again expressed their opinion favourably to the scheme B as propounded by SPML as compared to the scheme A as propounded by SPBL. 9. The synopsis of the respective schemes, namely, of scheme A and scheme B have also been given by the liquidator/applicant which is required to be captured for ease of reference and which is to the following effect : "Synopsis of scheme A submitted by M/s. Seshasayee Paper and Boards Ltd. (a) This scheme A submitted by M/s. Seshasayee Paper and Boards Ltd. (SPB) is a composite scheme of compromise/arrangement with and between the company, creditors and shareholders of corporate debtor and the proposed scheme of amalgamation of cor....
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....d scheme settlement amount in accordance with this proposed scheme, including discharge as against claims by guarantors by way of subrogation. Synopsis of scheme B submitted by M/s. Sun Paper Mill Ltd. (a) This scheme B submitted by M/s. Sun Paper Mill Ltd. (SPM) is a scheme providing only for compromise/arrangement with and between the company and its creditors and shareholders of corporate debtor. (b) The scheme B proposes to take over the corporate debtor by way of acquiring the entire assets of the corporate debtor as per the information provided by the liquidator/financial statements along with all other encumbered assets provided as security to financial creditors. (c) The envisaged arrangement scheme is to ensure the revival and continuity of business along with most effective use of the factory building, plant and machinery, and other assets of the corporate debtor. (d) The scheme B opts to write off the present equity share capital of the corporate debtor and will thereafter infuse fresh equity share capital after complying with all applicable laws of the land within 90 days from the date of the National Company Law Tribunal approving....
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....luding the one in relation to the company in liquidation on hand, it is seen that instead of dissolution of a corporate debtor, in case of a viable scheme proposed, the Adjudicating Authority is required to consider the same by wearing in effect dual hats, one as the Adjudicating Authority named under the IBC, 2016 in the matter of liquidation and the other as a Tribunal functioning as such in relation to approval of a scheme as envisaged under section 230 of the Companies Act, 2013. However, in relation to the company in liquidation acting under section 230 of the Companies Act, 2013, the liquidator has placed not one, but two schemes before this Tribunal for its consideration and has sought the directions of this Tribunal to decide which of the schemes, namely, scheme A or scheme B is to be approved. Further curiously dispensation of the meetings of the stakeholders and unsecured creditors are also sought for by the liquidator without seeking for any commensurate prayer in relation to secured creditors or other creditors if any of the company in liquidation. During the course of oral submissions in this regard, it was submitted by learned counsel for the liquidator that even the ....
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....r the law and as well as the interpretation given by the hon'ble Supreme Court that the commercial decision of the CoC is to prevail absolutely brooking no interference in the approval or rejection of a resolution plan and that the resolution professional therein does not have any say in the decision making in relation to a plan other than scrutiny that the scheme is within parameters and ascertaining that the proponents do not suffer any disqualification and performing the administrative functions of placing it before the CoC. From the submissions made during the course of arguments of respondents Nos. 1 to 3 it is evident that even though both the schemes are almost proximate to each other in their financial outlay, save certain differences in the allocation of funds to the different stakeholders, however, in relation to disbursal of the consideration as contemplated in the schemes, since there are no preconditions laid down by SPML as compared to SPBL and the time for disbursal seems to be speedier and quicker to the secured creditors under scheme B, their preference seem to lay with the scheme B formulated and propounded by SPML. 15. Further learned counsel for the fourt....
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....y 6, 2020 provides for the onus of paying the liquidation cost in relation to a compromise or arrangement proposed. Even though the regulation seems to be prospective in its application, however it is pertinent to note that a classification is sought to be made in relation to the onus of payment of the liquidation cost based as to whether the approval of this Tribunal of the scheme is under section 230(6) of the Companies Act, 2013 or otherwise than under section 230(6) of the Companies Act, 2013. While in the former case it is the corporate debtor which is required to bear the liquidation cost, while in the latter it is the scheme proponents. Thus, a distinction is sought to be drawn by the regulator, namely, IBBI while framing the concerned regulations in relation approval granted under section 230(6) of the Companies Act, 2013 and the approval when it is not granted under section 230(6) of the Companies Act, 2013. Even though as already stated it may not be material as regulation itself came into effect after the initiation of the liquidation process and the law which is required to govern is the one which was in vogue at the relevant point of time, however it gives a pointer to....
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....the com pany after the corporate debt restructuring as approved shall conform to the liquidity test based upon the estimates provided to them by the Board ; (iv) where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect ; and (v) a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered valuer. (3) Where a meeting is proposed to be called in pursuance of an order of the Tribunal under sub-section (1), a notice of such meeting shall be sent to all the creditors or class of creditors and to all the members or class of members and the debenture-holders of the com pany, individually at the address registered with the company which shall be accompanied by a statement disclosing the details of the compromise or arrangement, a copy of the valuation report, if any, and explaining their effect on creditors, key managerial personnel, promoters and non-promoter members, and the debenture-holders and the effect of the compromise or arrangement on any material interests of the directo....
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.... case may be, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator and the contributories of the company. (7) An order made by the Tribunal under sub-section (6) shall pro vide for all or any of the following matters, namely :- (a) where the compromise or arrangement provides for conversion of preference shares into equity shares, such preference share holders shall be given an option to either obtain arrears of dividend in cash or accept equity shares equal to the value of the dividend pay able ; (b) the protection of any class of creditors ; (c) if the compromise or arrangement results in the variation of the shareholders rights, it shall be given effect to under the provisions of section 48 ; (d) if the compromise or arrangement is agreed to by the creditors under sub-section (6), any proceedings pending before the Board for Indu....
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....p Cas 83 (NCLAT), it is required to be seen that while keeping the objectives of the IBC, 2016 in mind this Tribunal is required to approach and look into the scheme propounded by the proponents keeping the well-established principles laid down by the courts in India in relation to consideration and approval of such schemes, conscious of the fact that the corporate debtor is not in the process of CIRP and of approval of a resolution plan, but rather in the stage of liquidation process and is confronted with a scheme of compromise or arrangement which in its sweep also includes a scheme of amalgamation. The common objective to be achieved, in any case whether it be during the CIRP or during the liquidation process while considering a scheme of the nature on hand is for reorganisation of the corporate debtor in a time bound manner for maximization of value of assets of such persons and to promote entrepreneurship by balancing the interest of all the stakeholders, however the procedural approach between the two differs in view of the position that there is no prescribed procedure laid down in IBC, 2016 as well as the attendant rules and regulations framed thereunder for the considerat....
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....hus in relation to a liquidation process there seems to be a conflict as to whether the writ of the CoC will prevail or that of the liquidator who has been granted the power to deal with the liquidation estate, however, subject to the directions of this Tribunal as provided under the substantive provisions of section 35(2) read with the Regulations for which approval of this Tribunal is required, one being the approval of the schemes. 20. Alternatives even though welcome, however places a difficulty of choice and the same can be achieved only by comparing the two schemes available on hand by looking into the schemes in further detail reading in light of the synopsis. Scheme A in this regard as propounded by SPBL is taken up first. The important and salient clauses with the clause number given in the schemes itself being maintained in relation to the schemes for this purpose is extracted for analysis : "(a) The nature of the scheme is given in clause 1(b) of the scheme A which is as follows : A scheme of amalgamation with Seshasayee Paper Boards Ltd. ('SPB') under sections 230-232 and other applicable provisions of the Companies Act, 2013 (with SPL being....
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....nelveli unit) are acknowledged producers of high quality printing and writing paper. SPB will bring required technology and expertise and help re-engineer SPL's product line and production facility so as to manufacture high quality printing and writing paper, hitherto not being done in SPL. 22. SPB's strength is its ability to work with all the four sources of pulp (input for paper manufacture) namely, wood pulp, bagasse pulp, imported pulp and de-inked pulp. This strategic advantage helps SPB not only manage costs but also enables it to manufacture a varied set of paper products. This strategic strength is currently enjoyed only by very few mills in India. SPB will be able to extend this strength to SPL and thus ensure that it quickly revives and achieves faster financial turnaround of the operations. 26. SPB has not yet been able to meet the full requirements of all its customers in printing and writing paper segments considering the limited quantities that are available in its existing capacity. With SPL and its refurbished product mix, SPB will be in a position to open up and expand its markets. 28. Further SPB has proven credentials in turnar....
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.... their dues. Operational creditors (statutory-claims filed) 1199.01 1199.01 (100%) Claims filed by Assistant Commissioner (ST), Income-tax Department (Ward 2-CBE), Regional PF Commissioner (Tirunelveli), Director of Electricity Tax and Chief Electrical Inspector to the Government Unsecured financial creditors-others 1162.40 0.00 Claims filed by promoters (including the claims as employees) Total 6372.27 2606.87 Provision for CIR and liquidation costs 30.00 Total outlay for all unsecured creditors 2636.87 21. Paragraphs 41 and 42 of scheme A of SPBL deals with the manner in which they propose to deal with equity shareholders of the company in liquidation as given hereunder : "41. The existing equity share capital of the company, audited as of March 31, 2017 is as under : No. of shares (Rs. 10 value) Value (Rs. lakhs) Authorized share capital 5,00,00,000 5,000.00 Issued, subscribed and paid-up share capital 4,31,13,656 4,311.37 The balance in reserves and surplus including securities premium account of the company audited as of March 31....
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....nnual report for the FY 2015-16 Turnover/Revenue from sale of products 1097.87 1149.31 1015.70 Other operating 19.92 17.36 15.80 Other income 9.40 8.14 4.28 Total income 1127.19 1174.81 1035.78 (Amount in Rs. crores) As on 31-3-2018 (Ind-AS) As on 31-3-2017 (Ind-AS) As on 31-3-2016 (Ind-AS) Reference Annual report for the FY 2017-18 Annual report for the FY 2017-18 Annual report for the FY 2017-18 Share capital 12.61 12.61 12.61 Other equity/Reserves and surplus** 651.79 532.22 399.37 Total net worth 664.40 544.83 411.98 **Excludes capital reserve of Rs. 37.16 crores. (i) The usage of funds and sources of funding to successfully complete the scheme of amalgamation as contemplated between the company under liquidation and the SPBL have also been given which pans out as follows : Table-D Uses of funds Amount required/earmarked (Rs. lakhs) Remarks 1. Compromise/arrangement with creditors including liquidation costs (but excluding the amount set aside for contingent statutory dues) 12,740.87 45....
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....Registrar of Companies, Official Liquidator and others. The liquidator in presenting this scheme to the hon'ble National Company Law Tribunal, upon approval by the CoC and after agreement with the scheme proposer shall seek such approvals as may be required in accordance with law so as to fulfil that the terms, conditions and assumptions herein under section 230(5) of the Act. (c) Without prejudice to the generality of the above, all benefits, incentives, claims, losses, credits (including Income-tax, Service Tax, Excise Duty, Goods and Services Tax and applicable State Value Added Tax) to which the transferor company is entitled to in terms of applicable tax laws, shall be available to and vest in the transferee company from the cut-off date. (d) All the expenses incurred by the transferor company and the transferee company in relation to the resolution plan and scheme of amalgamation of the transferor company with the transferee company in accordance with this scheme, including stamp duty expenses, if any, shall be allowed as deduction to the transferee company in accordance with section 35DD of the Income-tax Act over a period of five (5) years beginning wi....
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....ould be the first tranche of payment of the scheme outlay amount. (b) Immediately, upon approval of this proposed scheme by the hon'ble National Company Law Tribunal under section 230 in accordance with the process thereunder we would transfer the balance proposed cash outlay of Rs. 12069 lakhs as full and final/second tranche into the said escrow account. (c) We propose that the amount so deposited in the escrow account, in both the tranches, shall be disbursed to the identified stakeholders in accordance with this revised scheme, only after the expiry of 45 days from the date of approval of the scheme by the hon'ble National Company Law Tribunal (or) after disposal of all appeals filed if any against the scheme so approved by the hon'ble National Company Law Tribunal before the Appellate Authorities, whichever is later." 23. The salient aspects of the scheme A as propounded by SPBL has been dealt with above. However, it is required to be noted that the CoC comprising of secured creditors is not inclined to wait for the disbursal of funds as contemplated in clause (c) highlighted as above being primarily the leading cause for their unfavourable opi....
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....heme B by SPML, namely : "The applicant is eligible to submit a scheme of compromise/ arrangement under the provisions of section 230 of the Companies Act, 2013. The applicant has fulfilled the eligibility criteria set out in the EOI for the takeover of 'Servalakshmi Paper Ltd.' (under liquidation) : Conditions laid down Applicant meeting the requirement Business capacity : Turnover : To have a turnover of Rs. 100,00,00,000 (rupees one hundred crores) or more as per the last audited financial statements As per the last audited balance-sheet for the year ending 31-3-2018, the applicant has recorded a standalone turnover for Rs. 257,66,36,603 (rupees two fifty seven crores sixty six lakhs thirty six thousand six hundred and three only) has a group level turnover of Rs. 1203.64 crores. Financial capacity : Net worth : Minimum tangible net worth of INR 100 crores at the group level in the immediately preceding completed financial year. Applicant meets the requirement as the net worth of the applicant at group level as on 31-3-2018 is Rs. 107.30 crores." 26. The following table as extracted from scheme B demonstrates the way in which SPML seek....
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....ting shareholders of corporate debtor : Sl. No. Category of shareholder No. of shares Share capital (in INR) Compensation provided in the arrangement scheme (in INR) 1. Promoter and existing promoter group 2,24,24,000 22,42,40,000 Nil 2. Public shareholders 2,06,89,65 20,68,96,560 41,37,931.20 Total 4,31,13,656 43,11,36,560 41,37,931.20 Summarizing the tables in relation to payments contemplated to the different stakeholders of the company in liquidation the following picture emerges under scheme B : Summary of consolidated payments to be made as per arrangement scheme : Particulars Total amount provided in arrangement scheme (INR in crores) Liquidation cost 0.75 Payment to SFC-secured (both term loan lenders and working capital lenders) 155.00 Payment to unsecured financial creditors 0.33 Payment to workmen and employees 0.35 Payment to OC 1.54 Payment/Compensation to public shareholders 0.41 Total 158.38 27. Means of finance sought to be raised for the amount of compromise proposed to the different stakeholders is sought to be arra....
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....line of business for more than 5 decades. The applicant also proposes appointment of present liquidator as custodian to supervise the implementation of the arrangement scheme. The liquidator shall distribute to all the stakeholders in accordance with the arrangement scheme the total amount of Rs. 158.38 crores deposited by the applicant in to the escrow account of the CD opened for implementation of the arrangement scheme. Release of securities On receipt of the payment of as per this arrangement scheme, the secured financial creditor/banks shall unconditionally release all securities/corporate guarantees/collaterals (pertaining to the corporate debtor) provided as security against the debt availed by the corporate debtor. - Financial creditor banks shall release their charge over the assets of the M/s. Servalakshmi Paper Ltd., which have been provided as security against the facilities availed from the financial lenders and hand over the original documents pertaining to the assets mortgaged with them and also release the corporate guarantees held by them after receipt of payment as per the arrangement scheme. The necessary form required for the ....
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....total 175,00,00,000.00 158,38,00,000.00 30. Respondents Nos. 2 to 5 have filed a reply/counter as the case may be in respect of the above application filed by the liquidator. In relation to the secured creditors, namely, respondents Nos. 1 to 3 they have parroted the same lines almost verbatim or adopted it uniformly after discussions with the scheme proponents which is to the following effect : "(i) The possession of assets shall be given to Sun Paper Mill Ltd. (fourth respondent) only after the financial creditors have been repaid their amount in full as contemplated in the scheme and existing charge on the assets is released. (ii) Any new charge on the assets of the corporate debtor required to be created pursuant to the scheme can only be a second charge ; existing charge shall continue to be first charge which shall be released on full settlement to the charge holder as provided in the scheme. (iii) The EMD amount of rupees two crores already given to the liquidator and the escrow amount of rupees ten crores as provided in the scheme shall be non-refundable and liable to be forfeited in the event of any default in implementing t....
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....me. 33. Thus, it can be seen that in a transaction of a reasonable magnitude as in the present instance, the quantum of payment offered by the respective proponents in their respective schemes to the different stake holders are almost on an even keel save some differences here and there. The financial capability and wherewithal to execute the respective schemes if either one is chosen, is also exhibited by both the scheme proponents as evident from the earlier paragraphs. Both the scheme proponents also belong to the industry as to the one being carried by the company in liquidation. Thus a piquant situation arises. 34. To resolve the same, drawing upon reference to precedents if any in relation to the provisions of section 230 of the Companies Act, 2013 or its predecessor under the provisions of section 391 of the Companies Act, 1956 in relation to a company in liquidation, as distressed concern or assets like the one on hand having economic value and also being maintained as a going concern, normally attracts diverse suitors for the economic benefit to be derived therefrom at competitive rates like moths to a candle, the hon'ble High Court of Gujarat when confronted wit....
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....nder Companies Act, 1956, this situation may not arise as it is neatly addressed in view of the IRP/RP/liquidator mandated under the statute to keep it as a going concern. However, what interests and fascinates this Tribunal is the observation of the hon'ble judge about the proactive role a company court is required to play when confronted with a situation to find a solution and not be bogged down by it and since the words of the hon'ble judge forcefully hits the nail on its head it would be better to reproduce his own words, lest should it do injustice as given in paragraph 9 of the said judgment, namely (page 718 of 46 Comp Cas) : "Law must take note of the existing situation in which problems that arise in law and have a human content have to be disposed of. Law cannot divorce itself off the mores of the day. Philosophy of law is functional and not analytical. Now, if the law takes note of the existing situation in which a problem has been put in the lap of the court, a solution must be sought through a machinery of law. Law cannot be static and its interpretation has to be dynamic. Law cannot operate in vacuum. Either by its pragmatic approach or progressive in....
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.... gleaned from the precedents as cited above as well as a somewhat elaborate discussion which necessitates this Tribunal to address a problem which has been put in its lap for which a dynamic solution is required to be found without being too analytical and at the same time without losing track in any way the objectives of the Code for which it was framed including for the resolution of insolvency and re- organisation which includes within its ambit revival and restructuring within a speedier time frame for maximization of value of its assets of the company in liquidation and guided by the decision of the hon'ble National Company Law Appellate Tribunal in S. C. Sekaran v. Amit Gupta (Company Appeal (AT) (Insolvency) Nos. 495 and 496 of 2018) [2019] 6 Comp Cas-OL 250 (NCLAT) and its ratio being reiterated in several other judgments passed subsequently including in the case of company in liquidation that the scheme proffered on liquidation is required to be considered under the provisions of section 230 of the Companies Act, 2013 without in any way losing sight of the objectives and provisions of the IBC, 2016 the following directions are sought to be issued : (A) Both SR....
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....er contemplation as directed by the hon'ble National Company Law Appellate Tribunal and envisaged under rule 2B of the IRCP Regulations, 2016 as amended even though made effective after the liquidation order taking a cue therefrom in view of the absence of substantive provisions or rules or regulations, save the judicial precedent for consideration of the scheme without any commensurate procedure, primacy of secured creditors is required to be maintained as the process as such is kept in abeyance as discussed in paragraph 19 supra. In the instant case the following are the stakeholders in relation to the company in liquidation and with their admitted claim, namely : Claim admitted Secured financial creditors (a) IOB 338,04,72,538.00 (b) Pridhvi Asset Reconstruction and Securitisation Co. Ltd. 158,30,89,052.00 (c) ARCIL 185,57,59,287.00 Total secured creditors 681,93,20,877.00 Unsecured financial creditors Financial creditors forming part of promoters 10,87,69,509.00 Operational creditors (b) Employees 1,41,57,384.00 (b) Statutory dues and others operational creditors 51,42,96,....
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....y the stakeholders and this action the Tribunal is of the view will be the best course available, where more than one scheme has been proposed as in the present instance and we find will also be in line with the proposed changes by the IBBI in relation to a resolution plan proposed under section 30 of the IBC, 2016 which envisages all eligible resolution plans to be placed simultaneously before the CoC for voting. Even though the proposal made by IBBI is in a nascent stage and we are conscious that only a discussion paper dated February 14, 2020 has been circulated calling for the view of the general public, however, in order to fill in the gaps in the Code or in the Regulations in relation to schemes presented in liquidation and if the successful proponents is not in a position to carry through the process, we direct both the schemes shall be simultaneously placed for voting before the stakeholders committee as contemplated by the IBBI similar to the draft proposal for placing all eligible resolution plans received before the CoC as envisaged under section 30 of the Code for its consideration and voting will be on the lines pro posed in the draft paper circulated by IBBI which are....