2024 (5) TMI 789 - AT - Insolvency and Bankruptcy

Scope of CIRP costs - Allowability of the claims during the CIRP to be treated as CIRP costs - waterfall mechanism - contract was completed during the CIRP period - cost attributable to the Respondent can be considered as CIRP cost or not - whether the costs incurred for the work done during the CIRP by Respondent No 1/subcontractor, can be considered as CIRP Cost or not by the Liquidator? - HELD THAT - From the extracts of the minutes of the CoC, it is clear that a conscious decision was taken that payments to vendors engaged in specific projects would be sourced from the cash flow generated by those projects' customers. The Darlipali Plant of the Corporate Debtor ceased operations during the CIRP Period. Consequently, the activities undertaken by Respondent No. 1, acting as a subcontractor, did not contribute to the Corporate Debtor's viability as a going concern. This pivotal factor led Respondent No. 2, in its capacity as the Resolution Professional, to exclude the costs incurred by Respondent No. 1 from the ambit of CIRP Costs. It is agreed that mere fact that the dues have arisen during the CIRP period would not be determinative of it to be classified as CIRP cost. Interpreting Section 5(13)(c) of the Code in this manner would render the words in running the business of the corporate debtor as a going concern otiose. Further, it is clear from Regulation 31 and the guidance provided by IBBI vide the above-mentioned circular that unless the CoC has approved the dues and they directly relate to the CIRP, the dues cannot be classified as CIRP cost. And the CoC decided to exclude the cost incurred from the terminated projects, which is not maintaining the Corporate Debtor as a going concern . In conclusion, the following criteria determine whether a cost incurred by the Resolution Professional during CIRP qualifies as CIRP cost (a) maintaining the Corporate Debtor as a going concern, (b) payment to suppliers of essential goods and services, and (c) direct relation to CIRP with approval from the Committee of Creditors (CoC). Applying these criteria to this case, the claim fails to meet the definition of CIRP cost. This has also been held so in various decisions of this Tribunal also. In Bharat Hotels Ltd. v Tapan Chakraborty 2022 (9) TMI 224 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI it was held that These issued may be decided in the meeting of the CoC and are not to be examined by the Adjudicating Authority even before the CoC takes a decision. It shall be always open for the appellant to raise issue regarding the cost in the meeting of the Committee of Creditors. With reference to the grievance of the Appellant with regard to obtaining valuation report, it is always open to the Appellant to request the Liquidator to obtain a valuation report, if not already obtained. The Respondent's claim should be classified as non-CIRP cost, falling under Section 53 of the Code for distribution during liquidation - The Respondent's claim doesn't meet the CIRP cost definition. It lacks CoC approval, doesn't support the going concern objective, and is subject to unrealized payments from NTPC. The AA's decision contradicts CoC's authority, previous rulings, and commercial realities and is therefore set aside. Accordingly, the Respondent's claim should not be treated as CIRP cost. Appeal allowed.

Summary

Issues Involved:
1. Classification of the claim as CIRP cost.
2. Compliance with the CoC decisions and regulatory provisions.
3. Interpretation of CIRP cost u/s 5(13) of the Code and Regulation 31 of the CIRP Regulations.
4. Adjudicating Authority's adherence to the doctrine of stare decisis and principles of res judicata.

Summary:

1. Classification of the claim as CIRP cost:
The Appellant, Liquidator of Sunil Hitech Engineering Ltd. (SHEL), contested the Adjudicating Authority's order to classify the claim of Respondent No. 1 as CIRP cost. The claim of INR 1,36,41,854/- by Respondent No. 1, related to work done during the CIRP period, was initially rejected by the Appellant and Respondent No. 2 (erstwhile Resolution Professional) as it did not meet the criteria for CIRP costs. The Adjudicating Authority, however, directed the Appellant to admit the dues as CIRP cost, leading to the present appeal.

2. Compliance with the CoC decisions and regulatory provisions:
The Appellant argued that the claim did not qualify as CIRP cost based on the decisions of the Committee of Creditors (CoC) and relevant provisions of the Insolvency and Bankruptcy Code (IBC) and regulations. The CoC had decided that only costs directly related to maintaining the Corporate Debtor as a "going concern" and approved by the CoC would be considered CIRP costs. The Darlipali Plant project, related to the claim, was terminated during the CIRP period and did not maintain the Corporate Debtor as a going concern.

3. Interpretation of CIRP cost u/s 5(13) of the Code and Regulation 31 of the CIRP Regulations:
The Appellant emphasized that u/s 5(13)(c) of the Code and Regulation 31 of the CIRP Regulations, costs incurred must be directly related to maintaining the Corporate Debtor as a going concern and approved by the CoC to be classified as CIRP costs. The CoC had not approved the claim of Respondent No. 1, and the project was not contributing to the Corporate Debtor's viability as a going concern.

4. Adjudicating Authority's adherence to the doctrine of stare decisis and principles of res judicata:
The Appellant highlighted that the Adjudicating Authority's decision was contrary to its earlier decisions and violated the doctrine of stare decisis and principles of res judicata. Previous similar applications were rejected by the Adjudicating Authority, which had held that dues could only be classified as CIRP costs if confirmed by the CoC during the CIRP period.

Conclusion:
The Tribunal concluded that the Respondent's claim did not meet the criteria for CIRP costs as it lacked CoC approval, did not support the "going concern" objective, and was contingent on unrealized payments from NTPC. The Adjudicating Authority's decision was set aside, and the Respondent's claim was classified as non-CIRP cost to be distributed under Section 53 of the Code during liquidation. No orders as to costs.