TaxTMI 
TaxTMI 
2018 (7) TMI 2251
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.... annexure 4 along with the application. 2. The Company Petition No. (IB)13 of 2017, was filed by J.R. Agro Industries P. Limited under Section 9 as "Operational Creditor" against Swadisht Oils Private Limited. On 30.05.2017, the petition was admitted, and moratorium order passed. Initially Mr. Manish Gupta was appointed IRP, but subsequently, upon recommendation of CoC, Mr. Vikram Bajaj was appointed as RP in place of Mr. Manish Gupta vide order dated 23.08.2017. The instant Application has been filed by Mr. Vikram Bajaj, RP. 3. The above-referred order of this Tribunal dated 30.05.2017 was challenged in appeal by a director of CD before NCLAT. The Appeal has been dismissed vide order dated 10.05.2018 and the order dated 30.05.2017 stands affirmed. 4. The Resolution Professional has stated in the application that there are only five financial creditors in the Committee of Creditors. One Financial Creditor namely, Jya Finance and Investment Company Limited, being a related party of CD, did not participate in discussion and did not vote. The CoC thus comprised of only four financial creditors, namely State Bank of India (88.18% share), Chirag Credit Capital (P) Ltd. (9.27% s....
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....The learned counsel appearing on behalf of the resolution Professional has contended that Section 31(1) provides that Adjudicating Authority shall approve the Plan if it meets the requirements laid down in section 30(2). In the present case, the Plan submitted by RLL meets all the requirements of Section 30(2) of IBC and Regulations 38 and 39 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations. Thus resolution plan should be approved. 11. It is contended on behalf of Resolution Professional that the requirements of section 30(2) are satisfied on following grounds: (2) It is further contended by Resolution Professional that requirements of regulations 38 and 39 are also satisfied on the following grounds; 12. It has been emphasized that the approval of resolution plan is mere formality because committee of creditors has approved a resolution plan with 100% vote share and the resolution plan satisfies the requirements of section 30 of The Insolvency and Bankruptcy Code 2016 and CIRP Regulations 38 and 39. 13. The Objections of Operational Creditors, who had filed Petitions under Section 9 of the Insolvency & Bankruptcy Code, 2016 (from now on r....
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....2 crore, inspite the fact that its claim of Rs. 8.52 crores is admitted by RP in information memorandum. 19. From the examination of these transactions, it is evident that the dues of the Operational Creditors are not only admitted but proved before the Resolution Professional/COC, i.e., they have even done forensic audit of their dues, after the order of NCLT. From the averments of the Corporate Debtor, it is clear that the Corporate Debtor failed to pay the Operational Creditors and made preferential payments to the State Bank of India to get bank guarantees of its Promoters released. 20. These transactions are prohibited preferential transactions under Section 43, 45 and 66 of the Insolvency Code, and appropriate orders can be passed by the Adjudicating Authority in this regard as per the Insolvency Code. 21. It is noteworthy that Stock and Trade Inventories has a difference of more than Rs. 5 crores as per information memorandum i.e. (Rs. 16,56,36,500 - Rs. 11,44,77,674 = 5,28,95,687/-), and difference between book value of assets and estimated (present) value of assets is short of around 31 crores i.e. (755019240 - 440925644). Both these values are evident at (Page No....
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....ible oil business is done by small Companies and as such, high net worth Companies would not be interested in filing a Resolution Plan for Corporate Debtor. Thus, only two Resolution Plans were filed - one Resolution Plan was filed by J.R. Agro Limited, and the other Resolution Plan was filed by M/s. Rajasthan Liquors Ltd. (from now on referred to as "RLL"). 27. The Resolution Plan filed by J.R. Agro Ltd. was rejected on the ground of ineligibility of JRAGRO due to the bar of Section 29A by Order dated 31.05.2018 passed by this Tribunal. The said Judgment and Order has been upheld by NCLAT in Appeal vide its Order dated 11.07.2018. Therefore, only one Resolution Plan filed by RLL remains under consideration, which was presented before the Committee of Creditors and also approved by the Committee of Creditors with 100% vote share. The objector has raised following objections against the resolution plan: 1.(a) The Committee of Creditors comprised primarily of State Bank of India, which held 88.16% stake and as aforesaid, it was a beneficiary of preferential and fraudulent transaction which are barred under the Insolvency Code. More interestingly, no payment is being made ....
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....n its Judgment while interpreting the Insolvency Code in the matter of Macquarie Bank Ltd. Vs. Shilpi Cable Technologies Ltd. in Para No. 10. (e) As such, the Promoters of both the 'undischarged insolvent' SOPL and the Resolution Applicant RLL are same as also admitted in the Resolution Plan and therefore, the Resolution Applicant is barred under Section 29A. Further, any Promoter or person in management control of Corporate Debtor, which has indulged in preferential transaction, undervalued transaction or fraudulent transaction is barred under Section 29A(a) of the Insolvency Code. (f) As aforesaid, the Promoter Groups are guilty and barred to submit a Resolution Plan through RLL. The Objects and Reasons given for amendment of Section 29A as evident from was explicitly to prevent such Promoters from defrauding its Creditors under guise of the Insolvency Code. (g) Further, the Resolution Plan has various other deficiencies:- i. Different persons, different payments without any rationale. ii. No specific amounts are not mentioned, as such, the Operational Creditors being paid only 5% amount. iii. The resolution plan submi....
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....ee of Creditors, to the AA. After that, u/s. 31, as reproduced supra, AA is to examine the contents of the Resolution Plan. The mandate of this section is that if the Adjudicating Authority is "satisfied" that the Resolution Plan as approved by the Committee of Creditors meets the requirement as referred to in section 30(2), shall by an Order approve the Resolution Plan. So the prerequisites is that recording of "satisfaction" by AA is a condition precedent. A "satisfaction" is to be recorded in writing in the Judgment approving the Resolution Plan. "Satisfaction" is required to be based upon a conscious decision on examination of the terms of the Resolution Plan. In our humble opinion, a thorough study of a Resolution Plan is required before recording a "satisfaction" in writing by AA. The "satisfaction" as mandated in the statute can either objective or subjective or both, but it is a condition precedent. Naturally, this is to be recorded after proper application of mind. The pros and cons of the scheme is required to be studied before recording subjective satisfaction. If the CoC has submitted the scheme of Resolution after visualizing the advantage and disadvantage, then such p....
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..... b. Reject the Resolution and extend the period for calling fresh Resolution Plans or taking any other rectifying steps. The right to extend 270 days as has been noted by Hon'ble NCLAT in the matter of Quantum Limited Vs. Indus Finance Corporation Limited and NCLT in the matter of Liberty House. c. The third method or more drastic method is, of course, to liquidate the Company, in case, the other two methods fail. 28. It is further submitted that the Promoters of the Insolvent Company SOPL cannot circumvent the law to cheat and defraud the Operational Creditors by presenting a Resolution Plan through their Company RLL, which is specifically barred under the Insolvency Code. 29. We have heard the argument of the learned counsels for the parties and perused the record. 30. The Operational Creditors M/s. Abhi Agro Pvt. Ltd., Rungta Industries Pvt. Ltd., Jai Lakshmi Solvents Pvt. Ltd., Arohul Foods Pvt. Ltd. has filed their objections against Resolution Plan submitted by Rajasthan Liquors Ltd. All the above mentioned Operational Creditor have mainly objected that the resolution plan submitted by Rajasthan Liquor Ltd. provides almost NIL value of dues to ....
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....cy resolution process of the corporate debtor: Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan; (d) has been convicted for any offence punishable with imprisonment for two years or more; (e) is disqualified to act as a director under the Companies Act. 2013; (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; (h) has executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code; (i) has been subject to any disability, cor....
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....lution plan but become ineligible, if they suffered from any disqualification mentioned in clauses (a) to (J) of section 29 A. Obviously, the SOPL which is undergoing insolvency resolution process is not eligible to submit resolution plan for itself hence the question of RLL becoming ineligible under clause (J) does that arise. 37. As regards use of expression "insolvent" in the order dated 30 May 2017 of this tribunal while admitting the petition, it is to be clarified that the word "insolvent" has been used in the above mentioned order in the context of the definition of this expression in The Sales of Goods Act. A perusal of the definition of the word "insolvent" given in section 2(a) of The Sales Of Goods Act it appears that the definition is presumptive and restrictive and does not imply that the person is in fact "insolvent" under Insolvency Law, which is clear from the qualifying word the definition "whether he has committed an act of insolvency are not" used in the definition. 38. Section 2(8) of The Sales of Goods Act provides that a person is said to be insolvent who has ceased to pay debts in the ordinary course of business or cannot pay his debts as and when it be....
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....ature has used the expression "undischarged insolvent" that expression must be given its full meaning. A person on being adjudged an insolvent remains so unless discharged regarding the provisions of Section 41 of the Insolvency Act, either absolutely or conditionally, or in the absence of annulment as contained in Section 35 of the Insolvency Act. 23. We are, therefore, of the view that the High Court was not justified in holding that the expression "undischarged insolvent" should be understood dehorns the Insolvency Act in a general sense." Section 5(37) of The Insolvency and Bankruptcy Code provides that: "words and expressions used but not defined in this Code but defined in the Indian Contract Act, 1872 (9 of 1872), the Indian Partnership Act, 1932 (9 of 1932), the Securities Contact (Regulation) Act, 1956 (42 of 1956), the Securities Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993), the Limited Liability Partnership Act, 2008 (6 of 2009) and the Companies Act, 2013 (18 of 2013), shall have the meanings respectively assigned to them in those Acts." 40. Given the ab....
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....al creditors at the cost of unsecured financial creditors. 44. In the resolution plan distribution of the above sum of Rupees, One Crore for payment to operational creditors is based on the age of dues has been justified by the resolution Professional on the principle of "going concern." It is contended that for sustaining operations of corporate debtor, the latest dues of operational creditors have to be given preference so that continuity in supply is maintained. 45. The UNICITRAL legislative guide on the insolvency law. Para 61 provides that "the normal ranking of claims under the insolvency law is observed by the plan and that similarly ranked creditors are treated equally. Some insolvency laws permit classes of unsecured creditors that are not entitled to priority to consent, by vote of the requisite majority of the class, to ranking different from that applying to distribution in liquidation under the insolvency law. A class of ordinary unsecured creditors that will not be paid in full might consent, for example, to distribution to a class of subordinated claims or equity holders. Claims and expenses that are administrative claims or are entitled to be paid in priority ....
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....tional creditors whose contribution has added to the value of the corporate debtor are getting almost nil amount. In such circumstances, it is beyond imagination that after approval of the plan the operational creditors will continue their supplies to the corporate debtor to keep the corporate debtor a going concern. 49. The learned counsel for the resolution Professional has further contended that so far the payment to Jya financial investment Co. Ltd. is concerned, it is to be noted that the aggregate dues of all unsecured financial creditors are Rs. 39.68 crore plus Rs. 1.58 crore, being dues of two other unsecured financial creditors namely Tilak Raj Sharma and Mrs. Rekha Sharma, who are promoters of SOPL. The dues of two promoters are being completely written off, and the other unsecured financial creditors will be paid only Rs. 24.60 crores. Thus the unsecured financial creditors are taking a haircut of Rs. 16.66 crores (they are being paid only Rs. 24.60 crores against their aggregate dues of Rs. 41.26 crores). Jya Finances taking the highest haircut of Rs. 13.93 crores. As against this, the operational creditors are getting a bonanza of rupees hundred lakh (under law not....
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....ng unsecured financial creditors, after hair-cut of 38% from their outstanding dues as on Cut-off date. 55. In clause 7.5 of the Resolution Plan, the distribution amongst the operational creditors is proposed to be made as per plan given below: 56. Ld. Counsel for the Operational Creditor J.R. Agro Industries Pvt. Ltd. has submitted that his total claim acknowledged in RLL plan is of Rs. 7,22,89,540. As per approved plan of RLL, this Operational Creditor will get 5% of the operational debt amount, i.e., Rs. 21,71,803/- without any interest, penalty or charges. 57. As per resolution plan approved by COC, total amount which is proposed to be distributed among operational creditors is Rs. 100 lakhs, whereas total admitted claim amount is Rs. 9,64,12,009/-. This shows that the operational creditors are getting negligible amount in the proposed plan. Emphasis has been given on the water fall mechanism as provided U/s. 53 of the Code, which provides priority to the unsecured financial creditors over above the claim which falls under the category of other debts and dues of the corporate debtor. 58. It is pertinent to mention that section 31(1) of the Code provides that if the ....
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.... (a) the insolvency resolution process costs and the liquidation costs paid in full; (b) the following debts which shall rank equally between and among the following-- (i) workmen's dues for the period of twenty-four months preceding the liquidation commencement date; and (ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in Section 52; (c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date; (d) financial debts owed to unsecured creditors: (e) the following dues shall rank equally between and among the following:-- (i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date; (ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest; (f) any remaining....
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....creditors over the operational creditors. The financial creditors were presumed to be strong creditors able to decide on matters regarding the insolvency of the debtor and who are Milling to take the risk of postponing payments. The operational creditors are not expected to bear the burden of postponing payments. This argument may, questionably, be relevant for determining the eligibility on the creditors' committee. But should the distinction continue right up to distribution priorities? For example, related parties do not have a place on the committee of creditors, but that does not deny their right in the waterfall, where they are at par with other unrelated parties. This, in turn, paves way for unscrupulous debtors and their related creditors to misuse the machinery for their benefit, at the cost of unsecured operational creditors. 67. The irony is, the unsecured operational creditors, being placed last, will get only after the financial creditors claim are satisfied, to the extent, the funds are available to offer. In fact, in many cases, the operational creditors might end up with no payment at all. All because of the prioritisation contemplated under section 53, as di....
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....or not treating unsecured financial and operational creditors at par. 72. As such, the priority given under section 53 fails to consider and appreciate the following:- (i) An economy runs not merely on the financial system, but on the system of supply of goods and services. Goods and services are supplied for credit, which is why operational creditors arise. Supply of goods and services on credit becomes a part of the working capital for the entity, which exactly serves the same purpose as served by financial lenders. (ii) Supply of goods and services on credit is a crucial part of the economy. The base of the economy of any country is its real sector; financial sector is important, but not at the cost of the real sector. Suppliers of goods and services, including MSMEs, are a part of the real sector. (iii) How will MSMEs continue to supply goods and services on credit to their customers, if they were to be told that if the customer goes into a default, all the money will go first to bankers, and money will be paid to the suppliers only if there is a surplus left? 73. For the reasons discussed above, the distinction between unsecured creditors, inte....
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.... some insolvency laws, these claims are always subordinated, and under other laws, they are subordinated only by inequitable conduct or fraudulent or quasi-fraudulent conduct. Where they are subordinated, the claims may rank after ordinary unsecured claims. Other approaches for treatment of these claims do not relate to ranking, but to restrictions on voting rights or to the amount or percentage of the claim that will be admitted in the proceedings. 76. On perusal of the UNCITRAL Legislative Guide on Insolvency Law, it appears that United Nations Commission on International Trade Law has rated the related persons claim subordinate to the claims below the rank of ordinary unsecured claims. Here, under I & B Code, 2016 unsecured financial creditors have been given priority over the claims of operational creditors. Operational creditors are also unsecured creditors, but the priority of claims of unsecured financial creditors over and above the claim of unsecured operational creditors is unique in I & B Code, 2016 only, whereas such distinction is not provided in Insolvency laws, prevalent in US, UK & Germany. United Nations Commission on International Law has specifically provided ....
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....rma and Rekha Sharma has been written off. 81. We strongly condemn the argument raised by Mr. R.P. Agarwal whereby he said that the operational creditors are like beggars. The operational creditors can never be compared with the beggars. It is pertinent to mention that contribution of the operational creditors results in value addition of the corporate debtor. Without help of operational creditors, no business can survive. As per the water fall mechanism given in Section 53 of the I & B Code, 2016 operational creditors claim is two rank lower than the claim of unsecured financial creditors. 82. There cannot be any distinction between unsecured financial creditor and unsecured operational creditors, because both are under the class of unsecured creditors. In US, UK & Germany, there is no such priority given to the claim of unsecured financial creditors over the unsecured operational creditors. Under the UNCITRAL Legislative Guide to Insolvency Law, clause 77 provides that "related persons claim to be subordinated to the claims of the ordinary unsecured claims. They are rank inferior to the claims of other unsecured creditors, under I & B Code, 2016, unsecured financial credito....
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....lution plan, the related party of resolution applicant, i.e., Jay Finance & Investment Co. Ltd. is getting Rs. 22.73 Crore out of his unsecured dues of Rs. 36.66 Crores. Resolution applicant, i.e., RLL is admittedly a related party of corporate debtor. The promoters of RLL and SOPL are same, two Directors of RLL & SOPL are also common. The same promoters are also responsible for the insolvency and restructuring of the corporate debtor SOPL. Under prevailing global practices, operational creditors claim should have been in rank above the claim of the Related party claim. 88. The resolution plan contains the details of transactions of resolution applicant and connected person with the corporate debtor in the preceding two years. The statement shows that during financial year 2015-16 and 16-17 on several occasions corporate debtor has taken advance from RLL and after some time it was refunded. It appears that Jya financial investment Ltd. which is a related party and shareholder of the corporate debtor has acted as a financial arm of the corporate debtor. It also appears that the liquidation value of the corporate debtor company would have been positive after paying secured credito....
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....lan secure financial creditor State Bank of India which has 86.18% vote share in the COC is not getting anything from the distribution of liquidation estate. Approved plan provides that SBI shall enhance the working capital limits from present limit of Rs. 20 crores to Rs. 30 crores. It is also clear that in 2016 the corporate debtor paid Rs. 50 crores to SBI and after that State bank of India issued no dues certificate DT. 18 October 2016 in favour of corporate debtor. Thus it is clear that SBI, which has 86.18% vote share in the COC was not aggrieved at all. Therefore they have proposed to enhance working capital limits from Rs. 20 crores to Rs. 30 crores. 95. Since approval of resolution plan was mainly dependent on its approval by SBI. Since you SBI was not aggrieved therefore they have not taken care of the dues of other unsecured operational creditors. 96. Since debt of Jya Finance and investment Ltd. is an intragroup debt. The Jya finance and investment Ltd. has always acted as a financial arm of the corporate debtor. In UNCITRAL legislative guide on insolvency law, such type of debt has been treated as an equity contribution rather than as an intragroup loan, with the....
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....on generally cannot be used." 76. Owners and equity holders: Owners and equity holders may have claim arising from loans extended to the data and claims arising from their equity ownership interest in the debt. Many insolvency laws distinguish between these different claims. Concerning claims arising from equity interests, many insolvency laws adopt the general rule that the owners and equity holders of the business are not entitled to a distribution of the proceeds of assets until all other claims that are senior in priority have been fully repaid (including claims of interest accruing after commencement). As such, these parties will rarely receive any distribution in respect of their interest in the debtor. Where a distribution is made, it would generally be made by the ranking of shares specified in the company Law and the corporate charter. Debt claims, such as those relating to loans, however, are not always subordinated. 77. Related persons: The category of creditors that may require special consideration is that of persons related to the debtor, whether in a familial or business capacity (see chapter II, para 183, and above, para 48). Unde....
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....ty over operational creditors, it would not be just to operational creditor. In this case, CIRP was initiated at the instance of unpaid claim of operational creditor, and if the resolution plan does not take care of his claim/interests, the purpose of resolution will be defeated. 101. Therefore, keeping in view the global practices, especially UNCITRAL legislative guide to insolvency law, we are of the view that claim of a related party, i.e. Jya Finance And Investment Company Limited should rank subordinate to the claim of operational creditors and treated at par with equity shareholders are partners under waterfall principle under section 53(1)(h) of the Code. 102. Thus, we hold that the debt of Rs. 36.6643 crore of Jay Finance & Investment Co. Ltd. Crores, which is admittedly a related party of corporate debtor should fall in the category of "equity shareholders are partners" as provided in section 53(1)(h) of the Code. Their claim will be treated at par with equity shareholders are partners, who are other unsecured creditors they rank below the operational creditors of the corporate debtor. 103. The clause 7.5 the approved resolution plan deals with income tax liabilit....
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....ruals as and when the same are crystallised after exhausting all legal remedies. It appears that by the proposed resolution plan that would be amalgamation of your SOPL with RLL. Clause 7.5 provides that "any liability arising in respect of income tax from remission of any liabilities under the resolution plan shall be operational debt towards central government for period prior to cut off date, and central government shall be operational creditor for such liability, and no amount shall be payable towards such operational debt to the Central government". By approving the Resolution Plan, we cannot allow exemption of any liability arising in respect of income tax. By approved resolution plan, the corporate debtor SOPL is merging with RLL. Therefore, any statutory liabilities of the transferor company shall be liability of the transferee company. Since income tax department is not party at this stage, therefore without hearing the department on this point, we cannot approve such resolution for granting exemption in respect of income tax liability that may crystallize in future. Thus clause 7.5 of the approved resolution plan cannot be accepted. 105. In the circum....
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....shall not be less than the amount payable to them in the event of liquidation w/s 53. Management of the affairs of the CD after approval of the resolution plan. Implementation Supervision. Plan does not contravene any of the provisions of the law for the time being in force. Conforms How dealt with in the Plan In Para 8/ at page 64, the Plan stipulates payment of IRP cost in priority to repayment of i other debts. In Para 7.5/ page 60, the Plan makes provision for payment of Rs. 100 lakhs to OCs. In the instant case, the liquidation value payable to OCs is NIL, and nothing will be payable to them in the event of liquidation. Hence, the above payment to OCs will be over and above the payment which they could expect in the event of liquidation u/s 53. This has been taken care of in Para 11/ page 65 of the Plan. and This has been taken care of in Para 12/ page 65 of the Plan. There is no provision in the Plan which contravenes any of the provisions of law. The Board has specified certain requirements in Reg. 38 and 39 which are also satisfied as shown in the subseque....
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....own in Reg. 38(1)(c) is redundant in the present case as all the FCs have voted in favour of the Plan and there is no i dissenting FC. The Plan takes care of interest of all stakeholders as interests of all stakeholders, mentioned in the following paragraphs of the Plan - including financial creditors and operational creditors, of CD. Settlement of dues of FCS- Plan Para 7.3/ page 59 Write offs of dues of some connected persons Para 7.4/ page 60 Settlement of dues of OCs.- Para 7.5/ page 60 Dues of Government - Para 7.5/ page 64 Disputed statutory liabilities - Para 7.6/ page 64 Employees' Interest protected- Scheme Para 8.4/8.5 on page 77 they will continue in service on same terms and conditions. Document 4 38(2)(a) 38(2)(b) 38(2)(c) 38(3) 39(4) and its Plan shall provide the term of the Plan implementation schedule. Plan shall provide for the management and control of the business of CD during its term. Plan shall provide for adequate means for its supervising implementation. Plan shall contain details of resolution applicant and ....