2021 (11) TMI 994 - AT - Insolvency and Bankruptcy

Liquidation of the Corporate Debtor - Constitution of CoC by the Resolution Professional in accordance with IBC provisions - Whether the recommendation for liquidation of Respondent No. 1 was taken by the CoC in contravention of IBC provisions? - Section 61 of the Insolvency and Bankruptcy Code, 2016 - HELD THAT - While the CoC took a decision for going for liquidation of the Corporate Debtor, the Appellants have challenged the very basis of constitution of CoC and fixing of voting rights by labeling it illegal, done to provide undue and unfair advantage to Respondent No. 4. Moreover, the Appellants have also claimed that the CoC took a decision for liquidation without following the procedure under CIRP stipulated in the IBC. The basic reason for seeking Resolution Plan under CIRP is to ensure that the Corporate Debtor can continue to function as a going concern, while taking care of interests of its creditors. Liquidation is the last resort which implies corporate death of the company. For the Corporate Insolvency Resolution Process to result in successful resolution of the corporate Debtor, preparation of a correct information memorandum is a must, which may result in work able resolution plans. In the present case, it is found that information memorandum was not prepared with full and correct details of assets and liabilities of the Corporate Debtor. The RP also did not pursue his application u/s 19(2). As a result the CoC decided to abandon the step of inviting of EOI for Resolution Plan. A duty has been cast on the RP under section 25 of IBC where he has to take immediate custody and control of assets of Corporate Debtor, including the business record of the Corporate Debtor; and furthermore a duty has been passed on the Resolution Professional under section 25(2)(g) to prepare an information memorandum in accordance with the provisions of IBC. Section 29 of the IBC requires the Resolution Professional to prepare an information memorandum in such form and manner contain such relevant information as may be specified in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016 for formulating a Resolution Plan. It is clear that the Resolution Professional has resorted to very novel and ingenious way of circumventing the duties imposed upon him in the IBC for preparation of information memorandum, exclusion of time to extend CIRP period and inviting Expression of Interest for Resolution Plan for the Corporate Debtor. He, with active support of Nitin Goel, representation of Respondent No. 4, managed to deal with these important issues in a very superficial and objectionable manner. Such action of RP betrays of prejudicial action reeking of favourtism for Respondent No. 4 - the CoC was not constituted in accordance with the provisions of IBC. In the matter, the CIRP was not pursued with fairness and due diligence by the Resolution Professional and the resolution for liquidation of the Corporate Debtor was taken in a meeting with an improper voting share ascribed to Respondent No. 4 and taken in unseemly haste. The CoC as constituted in the CIRP of the Corporate Debtor was not in accordance with provisions of IBC, therefore its constitution is quashed - claims of various financial creditors including home buyers should be appropriately fixed. Matter remanded to the Adjudicating Authority for taking action as directed, in accordance with the provisions of IBC and law - matter on remand.

Summary

Issues Involved:
1. Constitution of the Committee of Creditors (CoC) in accordance with IBC provisions.
2. Recommendation for liquidation of Respondent No. 1 in contravention of IBC provisions.

Detailed Analysis:

Issue 1: Constitution of the Committee of Creditors (CoC) in accordance with IBC provisions

Background:
The appellants, homebuyers in the project "SKYWALK RNE" developed by Respondent No. 1, challenged the CoC's constitution, alleging that the Resolution Professional (RP) clubbed the claims of Respondent Nos. 1, 2, and 3, amounting to ?30.70 crores with compound interest, thereby giving Respondent No. 4 (Capri Global Capital Limited) undue advantage of a higher voting share.

Arguments:
- The appellants argued that the RP wrongly included loans disbursed to Respondent Nos. 2 and 3 in the claim of Respondent No. 4, inflating its voting share to 96.77%.
- The appellants cited previous judgments, including the Hon'ble NCLAT's judgment in Capri Global Capital Limited vs. Value Infracon India Pvt. Ltd., which clarified that voting shares should be based on the amount actually disbursed to the corporate debtor under consideration.

Findings:
- The tribunal found that the RP failed to follow the judgment in Capri Global Capital Limited vs. Value Infracon India Pvt. Ltd., which mandated that voting shares should be based on the actual loan disbursed to the corporate debtor (?6.65 crores) and not the total loan amount (?149.09 crores).
- The RP's actions were deemed unfair, as he inflated the voting share of Respondent No. 4, leading to a biased CoC composition.

Conclusion:
The CoC was not constituted in accordance with IBC provisions. The tribunal quashed its constitution and directed the recalibration of claims and voting shares as per the correct legal framework.

Issue 2: Recommendation for liquidation of Respondent No. 1 in contravention of IBC provisions

Background:
The appellants contended that the decision for liquidation was taken in undue haste and without following the prescribed procedure for inviting Expressions of Interest (EOI) for a resolution plan.

Arguments:
- The appellants claimed that the RP did not pursue necessary applications under Section 19(2) of IBC to obtain documents and records from the ex-directors and promoters of the corporate debtor.
- The RP failed to prepare an accurate information memorandum, which is crucial for inviting resolution plans.
- The decision for liquidation was influenced by the inflated voting rights of Respondent No. 4, making the process biased and unfair.

Findings:
- The tribunal found that the RP did not take adequate steps to secure the records and account details of the corporate debtor.
- The RP's hasty actions and failure to follow due process led to an unjust decision for liquidation.
- The CoC's decision was swayed by the inflated voting rights of Respondent No. 4, compromising the fairness of the process.

Conclusion:
The recommendation for liquidation was taken in contravention of IBC provisions. The tribunal directed the replacement of the current RP and the recalibration of claims and voting shares. The matter was remanded to the Adjudicating Authority for further action in accordance with IBC and law.

Final Directions:
1. The CoC's constitution is quashed.
2. Claims of financial creditors, including homebuyers, should be fixed appropriately.
3. Application for exclusion of time spent in pursuing applications should be preferred before the Adjudicating Authority.
4. The current RP, Sanjay Kumar Singh, should be replaced, and a new RP should be appointed.
5. The Insolvency and Bankruptcy Board of India should investigate the conduct of the current RP and take appropriate action.

Conclusion:
The tribunal found significant procedural lapses and bias in the actions of the RP, leading to an unfair decision for liquidation. The matter was remanded for reconstitution of the CoC and further proceedings in accordance with the law.