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2024 (8) TMI 325
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....be expected its loan was notified as NPA by the lender. Thereafter on 24.03.2017, the IOB assigned the debt of the petitioner-company to M/s. Alchemist Asset Reconstruction Company Ltd., (hereinafter referred to as 'Financial Creditor/FC). b) The assignee of the loan, as a Financial Creditor moved the NCLT with an application under Sec.7 of the IBC against the petitionercompany for initiating a Corporate Insolvency Resolution Process (henceforth CIRP). The statutorily prescribed course of action commenced, accordingly an Interim Resolution Professional (IRP) was appointed, Committee of Creditors (IOB) was constituted, and it approved the resolution plan and submitted it, and on 06.12.2021 it was approved by the Adjudicating Authority, the NCLT. c) In terms of the resolution plan, only the financial creditor of the petitioner was partially benefited, since the value of the assets of the petitioner was far short of the value of the liability it faced. So far as Operational Creditors are concerned, the resolution plan directed that they would be paid pro rata at 1% of the value of their claim. The petitioner accordingly redeemed itself from the debt-trap it faced....
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....o any local authority is made part of the resolution plan, it shall stand extinguished, and hence, no proceedings in respect of such dues for the period prior to the date on which the adjudicating authority grants its approval to the resolution proposal will survive. Reliance was also placed on the ratio in Paschimanchal Vidyut Vitran Nigam Ltd. Vs Raman Ispat Private Limited and Others [2023 SCC OnLine SC 842], and Committee of Creditors of Essar Steel India Limited, through authorised signatory Vs Satish Kumar Gupta and Others [(2020) 8 SCC 531]. 5.1 Per contra, representing the TANGEDCO, Mr.J.Ravindran, the Additional Advocate General, submitted that it may be that under the scheme of IBC, TANGEDCO might be an operational creditor, but inasmuch as TANGEDCO's activities are governed by the Electricity Act, 2003, and the Electricity Supply Code, it cannot forego its claim. Reliance was placed on the ratio in State Tax Officer Vs Rainbow Papers Ltd., [2022 SCC OnLine SC 1162] ; K.C.Ninan Vs Kerala State Electricity Board and Others, [2023 SCC OnLine SC 663 (para 117, 341)], and M/s.Empee Distilleries Limited Vs The Superintending Engineer, Pudukottai, Electricity Distributio....
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....ment of its affairs, but significantly free of all its liability, with its only financial creditor walking away with the chunks, and the operational creditors forced to settle for the crumbs which the IBC regime generously feed them with. 7. The TANGEDCO, a statutory entity, a Generator cum Distribution licensee of electricity in this state, with a claim of around Rs.32.0 lakhs, does not figure anywhere in the scheme of this Resolution Plan, as it has not preferred a claim before the Interim Resolution Professional pursuant to the public notice issued at the instance of the Adjudicating Authority under the IBC (read the same as NCLT). After all, TANGEDCO is only an Operational Creditor within the definition of the term under Sec.5 (21) of the IBC, for whose money and loss the IBC shows scant respect or concern. (But the legislation is still valid). Curiously enough, the petitioner also did not disclose its dues to TANGEDCO in its Resolution Plan. 8. TANGEDCO, very innocently demanded its dues, but the petitioner has a prompt response to it: "We had one great holy dip in the IBC, and all our sins are washed away. Today, we are a new born, with a clean-slate balance sheet, with....
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....ciousness of the Courts. The onus is on the Courts. It is a constitutional obligation which this court can neither reject nor ignore. This obligation is defined by a realization that every citizen in this country is an equal citizen and every ounce of property one possesses in this country is precious. If right to dignified existence in this country has to have any meaning beyond the rhetoric that we are often fed with, then its inalienability to right to property deserves a special recognition. The sense of justice of the Court is summoned every time the individual right to property faces a conflict. It is here the interest of the operational creditors has drawn the notice of this Court and the possibility for potential misuse of the IBC and the regime it has created has become a source of its concern. 11.2 Pursuit to justice shall not let to be hindered by any attitude that may find appreciation in a School of Mathematics. The existential relevance of Courts as an institution to the citizenry of this country depends on its strength to identify those rights in crisis within the structure of the Rule of Law which the Constitution of this country advocates with pride, and its abi....
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....nduct a feasibility study for devising a measure to rehabilitate the company. SICA, however, was repealed in 2004, and one of the reasons behind this move appears to be the rampant misuse of the moratorium provided under Sec.22. One noticeable difference which is instantly visible on a broader comparison of SICA and the IBC is that while SICA was debtor driven, the IBC is financial creditor driven. In effect the soul of the IBC appears to be that which the Parliament has junked vis-à-vis the SICA. 14.2 The IBC aims to settle the corporate creditors with minimal damage to the existential possibilities of a corporate debtor. Surely on paper it appears to provide possibilities of a win-win situation, something which the draftsmen of IBC may elate about. In that sense IBC may be acclaimed as a path breaking legislation, but it is doubtful if it has broken the path without breaking the back of some of the stakeholders - more particularly the Operation creditors. How secured are the operation creditors under the IBC regime? This requires a dispassionate understanding of the scheme of the IBC and the judicial pronouncements on its working. They are provided below. 15. It comm....
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....nted, he or she replaces the Board of the corporate debtor and the entire managerial responsibility of the corporate debtor vests in the IRP and to this extent the powers of the Board of directors of the corporate debtor will stand suspended (Sec.17). e) Under Sec.18, the IRP is required to prepare an asset and liability statement of the corporate debtor, and this may include such claims he may have received pursuant to the public notice issued by the NCLT under Sec.13. Now, notwithstanding the suspension of the Board of Directors of the corporate debtor under Sec. 17(1)(b), in terms of Sec.19, the Board of the corporate debtor is still under a statutory obligation to extend its assistance and co-operation to the IRP, and is duty bound to provide all necessary information to him or her. Indeed, on its failure to provide necessary assistance or cooperation, the NCLT has the power to direct the suspended Board of the corporate debtor to provide the same to the IRP. f) The next significant responsibility of the IRP is to constitute a Committee of Creditors (CoC) once he completes the preparation of the asset and claims statement of the creditors of the corporate debt....
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....) Under Sec.30 (2) (b) (introduced vide Act 26/2019 and brought into force on 16.08.2019) the RP is inter alia expected to ensure that the proposal for payment to the operational creditor is not less than what they may have obtained in a liquidation proceedings or that they would have obtained in the order of priority in the liquidation proceedings as provided under Sec 53(1), whichever is higher. But the most significant part of this activity is that the RP is required to ensure in terms of Explanation I of Sec.30(2) that "distribution in accordance with this clause shall be fair and reasonable to such creditors", which contextually mean the 'operational creditors'. Some small mercy for the operational creditors, or is it a condescending care that IBC extends? l) Under Sec.30(4) the CoC is required to approve the resolution plan with a minimum of 66% vote in favour of the said plan. And, under Sec.31 this resolution plan as approved by the CoC is required to be approved by the Adjudicating Authority, the NCLT, after it satisfies itself that the resolution plan has provisions for its effective implementation. This is provided in the Proviso to Sec.31(1). Necessarily it has....
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....n? 19. It now throws open a need to understand (i) whether IBC enables a possible collusion or a collaboration between the corporate debtor, financial creditors, and the one who is supposed to be equidistant to both - the IRP and the RP for outsmarting the interests of the operational creditors; and (ii) whether the CST is a panacea for the corporate ills (or is it evils?) of a corporate debtor. In short, the question would be whether the objective behind the IBC could be hijacked by private motives of those in whom the IBC has invested its trust - the trust the Parliament has invested; the trust the people of this country have invested. And if it could be, does it not impose a responsibility on the legal system of this country of which the courts are the sentinel on the qui vive to step in to shape up a just and fair outcome within the framework of law? 20. Having understood the scheme of the IBC, it is now time to navigate through the authoritative pronouncements of the Hon'ble Supreme Court. It is neither about the creation of two broad categories of creditors - the financial creditors and the operational creditors by the IBC, nor about the differential criterion which IBC....
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....ute the whole. These sub-rights weave themselves into each other, and as a consequence, State action or the legislation that results in the deprivation of private property must be measured against this constitutional net as a whole, and not just one or many of its strands." This necessarily includes the right to enforce or secure the right to property, which we commonly understand as right of action. Ordinarily, a person with a claim has the right of action to enforce the claim before a neutral arbiter, be it the Court or a tribunal, both of which are positioned equidistantly from opposing claims. This is the minor premise. (f) IBC & Neutral Tribunal 23. It could now be derived that where a substantive right to property is in peril, the right of action before a neutral tribunal springs into action for obtaining justice in the cause. This is fundamental to our Constitutional jurisprudence. In Union of India Vs Madras Bar Association [(2010)11 SCC 1], a Constitutional Bench of the Supreme Court has held: "101. Independent judicial tribunals for determination of the rights of citizens, and for adjudication of the disputes and complaints of the citizens, is a necessar....
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....6.1 In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law." Inasmuch as India is a signatory to UDHR, there is a binding obligation on the Parliament of this country to provide a neutral forum for the operational creditors to present their claim. 24. However, the scheme of IBC provides for a two-tier mechanism for approval of a resolution plan - first by the CoC and next by the Adjudicating Authority. Now, unless the Adjudicating Authority is treated as a neutral tribunal for the operational creditors to defend and secure its right to property which they have in their claims against any perceived unfair and inequitable treatment meted out to them by the CoC, even if the CoC has acted bonafide, there is a lurking danger of IBC straying into the zone of unconstitutionality for breaching the dictum of the Constitution Bench in the Madras bar Association case. (g) Discussion on the Authorities 25. What then is the role which the Adjudicating Authority is expected to play? This issue, it must be said,....
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....hus was born the rule of commercial wisdom of the CoC. If the ratio in this case is analysed carefully, the question before the Court has little to do with the rights of the operational creditors or the interest that they are entitled to, to have them protected through a neutral judicial forum. 25.2(a) However, in the Essar Steeel case [(2020)8 SCC 531], a three Judges bench of the Supreme Court had expanded the scope of the doctrine of commercial wisdom of the CoC and telescoped it into a situation to undo the effect of the interference which the Appellate Authority had when it brought in its perception of equitability and fairness vis-a-vis the approval granted by the Adjudicating Authority to the resolution plan placed before the latter. It may be stated in that case, the CoC constituted sub-committee of creditors (which it named as the core-committee of creditors) which engaged with the resolution applicant, and tweaked the original resolution plan which was later came to be accepted by the majority of the financial creditors in the CoC. In the process, the CoC voted out the financial creditor which initiated the CIRP and provided nothing significant for operational creditor....
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....resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove." 25.3(a). The ratio laid down in the Essar Steel judgment was followed by another three-Judge bench of the Supreme Court in the case of Ghanashyam Mishra and Sons Private Limited Vs Edelweiss Asset Reconstruction Company Limited [(2021) 9 SCC 657]. In the said case, the Supreme Court dealt with a batch of appeals wherein the statutory authority attempted to recover the statutory dues from the corporate debtor after a resolution plan had been approved. In the lead case, M/s Orissa Manganese & Minerals Ltd. went through CIRP. There were three resolution applicants who inter alia included Ghanashyam Mishra & Sons Private Ltd., and a certain M/s Edelweiss Asset Reconstruction Company Ltd. The plan of Ghanashyam Mishra was approved by the CoC and the plan of Edelweiss was not even admitted by the Resolution professional. Edelweiss challenged the nonadmission of its plan before the NCLT. Alongside, the workmen of the corporate debtor also challe....
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....d the limited power of review vested in the Adjudicating Authority to satisfy himself that the resolution plan conforms to Sec.30(2) of the IBC. 26. These authorities of the Supreme Court are now followed by four judgements of the Supreme Court delivered by four different two judges benches. They are: State Tax Officer Vs Rainbow Papers Ltd., [(2023) 9 SCC 545], Paschimmanchal Vidyut Vitran Nigam Ltd., Vs Raman Ispat Pvt. Ltd., & others [(2023) 10 SCC 60] and Sanjay Kumar Agarwal Vs State Tax Officer & another [(2024) 2 SCC 362] and M.K.Rajagopalan Vs Dr.Periasamy Palani Gounder & another [(2024) 1 SCC 42]. They are now considered : a) In the Rainbow Papers case, the facts that visited the Supreme Court was whether the statutory dues which was being litigated between the statutory authority and the corporate debtor and was pending even before the initiation of the CIRP against the corporate debtor is saved when the resolution plan that came to be approved by the CoC does not disclose the statutory dues. The RP defended it on the ground that the statutory authorities did not make a claim pursuant to the public notice. The Court held that the resolution plan is bad in law....
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....e M.K.Rajagoplan case. In this case the Court has considerably watered down the concept of the commercial wisdom of the CoC when it held that commercial wisdom of the CoC will have supremacy only when it is formed on the basis of complete disclosure of information. It reads: (Per Dinesh Maheswari J): "160: As noticed hereinbefore, commercial wisdom of CoC is given such a status of primacy that the same is considered rather a matter non-justiciable in any adjudicatory process, be it by the adjudicating authority or even by this Court. However, the commercial wisdom of CoC means a considered decision taken by CoC with reference to the commercial interests and the interest of revival of the corporate debtor and maximisation of value of its assets. This wisdom is not a matter of rhetoric but is denoting a well-considered decision by the protagonist of CIRP i.e. CoC. As observed by this Court in K. Sashidhar [K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150 : (2019) 4 SCC (Civ) 222] , the financial creditors forming CoC "act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject-matter....
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....t to override all other considerations. Nor the dominant or the exclusive role which the CoC enjoys within the scheme of the IBC for giving its approval to a resolution plan places it beyond the judicial reach. Commercial wisdom of the CoC, strict senso, may be understood as a knowledge based psychological factor with a subtle blending of intuition of a group of self interested creditors. Until the Rainbow Papers case, it was not adequately brought to focus that unless the commercial wisdom of the CoC in approving a resolution plan conforms to the requirements of Sec.30(2), it may not pass the scrutiny of the Adjudicating Authority under Sec.31, even though the Essar Steel case has not overlooked this aspect. If Sec.30(2) is scanned for its nature, it imposes restriction on the freedom of the CoC to decide the way their collective wisdom may tempt them to decide, by casting a duty on them - to care for the operational creditors. This aspect will be specifically discussed later. 28.2 Therefore, to reduce an understanding of the phrase 'commercial wisdom of the CoC' - a coinage of the Supreme Court, as a synonym to the collective freedom of the CoC sans the duty which Sec.30(2) im....
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....e operational creditors, as if the Court with a backswing of its hand has rejected the need of the CoC to be just, fair and equitable to the operational creditors. What apparently is missed is the Explanation I to Sec.30(2) which creates a statutory obligation on the CoC to be just, fair and equitable in dealing with the rights of the operational creditors. In the opinion of this Court the declaration of the Supreme Court in the Essar Steel case on the absence of a fiduciary relationship between the CoC and operational creditors does not operate to undermine the effect of Explanation I to Sec.30(2). It can be explained. 31.2 There cannot be a dispute that there exists no fiduciary relationship between the CoC and the operational creditors, since for a fiduciary relationship to emerge between two persons or entities, there ought to be in existence an equation where they either share a mutual relationship in absolute confidence, or at least one investing all its confidence on the other. Now, given the fact that an operational creditor is as much a creditor as the financial creditor, and since an operational creditor's value for its money is no inferior to that of the financial cre....
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....n its business. Therefore, the commercial wisdom of the CoC can never extend to the extent of protecting the interest of the operational creditor. It is like expecting a lion to share a slice of his catch with a lesser predator when we all know that it is not even known to share its meal with its own pride. Therefore, unless one understands the role of the CoC for the purposes of Sec.30(2)(b) as a trustee of the operational creditor, fairness of its action cannot be exacted from it in terms of Explanation I to Sec.30(2). 31.5. Now, even if Explanation I to Sec.30(2) is not there in the statute, as long as the CoC functions as the statutory trustee for the operational creditors, its duty to be fair and equitable cannot be forsaken. If viewed differently, where will the impetus for the operational creditors be to initiate an insolvency proceeding against the corporate debtor under Sec.9 if they are not assured of a fair and equitable treatment? Neither logic, nor life's experience will ever support this proposition. 32. This now necessitates that the plan approved by the CoC should be (a) based on complete disclosure of information; (b) that its treatment of the interest of the....
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....l creditor, should the failure of the IRP and the RP to gather such information which, they exercising due diligence could have collected, be given a discount? This is now discussed in greater detail. To remind, the respondent herein was an undisclosed operational creditor (no matter whether it is statutory or not) in the resolution process, and its claim is now hanging perilously from the cliff hanger called the CST. (ii) Duty of the Suspended Board of the CD 36. The first aspect which now concerns the court is the duty of the suspended board of the corporate debtor. When an IRP is appointed, he replaces the Board of the corporate debtor, but under Sec.19, the suspended Board of the corporate debtor is still under a statutory obligation to assist and cooperate with the IRP. Contextually, the expression to 'extend all assistance and cooperation' does not and cannot imply coffee with the IRP, but a subtle way of communicating the legislative intent that the suspended Board shall share all the information which will be useful for the IRP to prepare its assets and liability statement of the corporate debtor. To state it differently, Sec.19 casts a duty to make full an....
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....RP nor the RP (in cases where both are different) are blindfolded to travel in a pitch-dark alley but are expected to exercise utmost diligence in accessing every material to which he may lay his hands on as a trained professional. 41.1 Moving further, while ascertaining the list of creditors of the corporate debtor, the IRP or RP may act on the information shared by the suspended Board of the corporate debtor, his own reading of the previous financial statements of the corporate debtor, and also the claims preferred pursuant to the public notice issued by the Adjudicating Authority under Sec.13 read with Sec.15. It may be stated here that merely because a public notice is issued about the admission of an insolvency proceeding against a corporate debtor in couple of newspapers, it cannot be presumed that every creditor, be it operational or financial, will readily read it. And to re-emphasise, the working of the IBC should not ignore or overlook the fact a claim to money of the creditors is their Constitutionally protected right to property under Art.300A, and hence it cannot be destroyed merely because the creditors have not preferred any claims pursuant to public notice. Seen ....
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.... their duty, and how their abject callousness drowns the operational creditors into poverty, more particularly the MSME operational creditors. Indeed, it is common experience of most courts in this country that they do not even respond to the summons issued by the court in any suits or appeals or other proceedings involving a corporate debtor. It may be that there may be a moratorium on litigations during the pendency of the resolution process, but it requires to be emphasized that every litigation can give the IRP or the RP some information about the assets and liabilities of the corporate debtor. It could now be derived that due diligence expected of the IRP or the RP makes it mandatory for them to take note of any pending litigations while preparing the statutory documents that they are required to prepare. And, it follows that, if they fail to collect those information, necessarily there is a failure on their part to act with due diligence. (To ensure that the IRP and the RP act with due diligence, it may be necessary to inform the Adjudicating Authority/the NCLT about the pending litigation, which in turn may ensure that the Information Memorandum is a complete document on the....
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.... not substitute its sense of fairness and equity to replace the commercial wisdom of the CoC. The Rajagopalan effect, it must be stated, does not stop with bringing in clarity in understanding the expression 'commercial wisdom' of the CoC, but also has interfered to realign the understanding of the duty of the Adjudicating Authority. Therefore, even though the Adjudicating Authority may not sit in appeal over the commercial wisdom of the CoC, still it is required to exercise a jurisdiction, akin to a revisional jurisdiction, to ascertain the correctness of what has been done before and by the CoC. And, this may have to be appreciated in the backdrop of the Constitutional need to constitute the Adjudicating Authority as a neutral tribunal to save IBC from facing embarrassing moments in view of the law declared in the Madras bar Association case. Set on this plane and based on the discussion hereinabove made, it could be now derived that the Adjudicating Authority may refuse to give his approval to a resolution plan as approved by the CoC in the following circumstances: a) if the information which forms the basis for the CoC for according its assent to a resolution plan is i....
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....onsequences: a) If after a successful completion of a resolution process, the same promoters or substantially the same set of directors of the corporate debtor continue to be in the management, then CST will not apply to forfeit the rights of the undisclosed creditors when the suspended Board had an opportunity to disclose all its creditors during the resolution process. One who owes a duty to disclose cannot take advantage of one's own suppression of information. b) If after a successful resolution process, a third party-resolution applicant takes over the corporate debtor, then CST will apply to extinguish the rights of the undisclosed creditors but only against the successful resolution applicant or its successors-in-interest, and not against the promoters or the suspended board of directors of the corporate debtor. It should not be forgotten that CST is a judicial coinage to protect the third party-successful resolution-applicant from the uncertainties of future claims, and not invented to protect the fraud and suppression of the suspended board of the corporate debtor. 49.3 In all the cases, where the undisclosed creditors' rights are kept alive agains....
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....his court did not intend to invest more time, of a collusion between the corporate debtor and its only financial creditor. This is explained as below: ➢ Let the facts be examined closely again: Here is a MSME in debt-trap. It has one secured financial creditor, and God knows how many operational creditors it had. At least TANGEDCO was not one of its disclosed operational creditor. If the aim of the IBC is to preserve the assets of the MSME as a going concern even as it struggles to find a way out of it, and if the only financial creditor had shared this concern and had chosen not to liquidate the MSME, then it could have easily invoked the SARFAESI Act, more particularly Sec.13(4)(b) and could have taken over the management of the MSME. This would have ensured that not only the MSME is saved, but the interests of the operational creditors are also preserved intact. This must also be appreciated in the context of the nature of solution that had eventually developed in the resolution plan offered and accepted: The MSME petitioner offered to sell its non-core assets for paying off its debts to its only financial creditor. This still could have been achieved without a C....
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....stakeholders such as (i) debtors (ii) creditors (iii) resolution professionals and (iv) resolution applicants, have started attracting the attention of courts. For instance, NCLAT highlighted in a case very recently, that large business houses with multiple business arms cannot be allowed to disrupt small businesses. Cases of (i) misconduct on the part of the Resolution Professionals (ii) highhandedness on the part of some of the creditors (iii) abuse of the Code by debtors, through collusive CIRPs and (iv) vultures eyeing for takeover of healthy companies are actually on the rise. The percentage of hair cuts have increased to such an extent that in some cases, they appear as close shave. Therefore, it will be worthwhile to have a thorough study conducted at the earliest so that there is a timely cure. Otherwise, we may land up in a situation where IBC itself may need a resolution plan." Shri. Anant Merathia's book titled "Defaulter's Paradise Lost" also makes a poignant reading on the functioning of the IBC. 52.2 In the context of attempts to avoid the dues to TANGEDCO by the corporate debtor, it is relevant to refer to the following passage from ju....