2025 (4) TMI 1402 - AT - IBC

Seeking direction for payment of operational debts - Power of Committee of Creditors (CoC) was empowered under the Process Memorandum to invoke the Performance Bank Guarantee (PBG) - clear violation of letter of intent and process memorandum by Formation. Whether under the Process Memorandum (March 2018) issued by RP the action of CoC to invoke PBG on 10.12.2018 was not covered by any of Clauses of Process Memorandum and invocation of PBG was unsustainable? - HELD THAT - In the facts of the present case when Resolution Plan was submitted by the SRA which was considered and approved and the approved Resolution Plan is statutory binding on the SRA by virtue of Section 31 sub-section (1) and as per law laid down by the Hon ble Supreme Court in Ebix Singapore 2021 (9) TMI 672 - SUPREME COURT . Learned Counsel for the Formation has also referred to Clause 14.2 to 14.6 and 15.1 of the Process Memorandum to submit that invocation of PBG of Rs. 50 crores was made towards the money required for equity component. Thus there is no question of Clause 14.6(c) being attracted since the Resolution Plan itself was vitiated. It is submitted that Clause 15.1 was also not attracted since Resolution Plan submitted by Formation was approved and the said clause applies only when there is withdrawal prior to approval by Adjudicating Authority. Clause 14.6 as noted above empowers the CoC to invoke the Performance Guarantee if Resolution Plan has not been implemented by the SRA to the satisfaction of the CoC. Clause 14.6 thus clearly contemplate the situation when Performance Guarantee can be invoked. The present is not a case where CoC has exercised Clause 15.1. Clause 15.1 is neither attracted nor has been invoked by the CoC. However Clause 15.4 reserve the right to CoC to take any action against the Successful Resolution Applicant including invocation of PBG as well earnest money. It is also noted the email dated 17.01.2020 by which decision of the CoC was communicated to the Formation which clearly mentions that CoC has invoked the Performance Guarantee since SRA has failed to implement the Resolution Plan. The CoC thus has invoked its power under Clause 14.2 to 14.6 and 15.4 for invocation of the PBG which is fully in accord with the Process Memorandum and the submission of the Formation that CoC could not have invoked the PBG in the facts of the present case is without any substance. Whether the finding of the Adjudicating Authority that CoC and RP had not treated that approved Resolution Plan had been contravened by the Formation are based on materials on record? - Whether sufficient materials were placed by CoC and RP before the Adjudicating Authority to establish that Formation has failed to implement the approved Resolution Plan? - HELD THAT - The Adjudicating Authority itself has noticed the submission of the CoC that Resolution Applicant has defaulted in making the payment as per the Resolution Plan. The findings returned by the Adjudicating Authority in paragraph 50 that CoC and RP had not treated that the approved resolution plan had been contravened by the applicant-Formation is unsustainable. There was sufficient material placed by the CoC and RP by means of various applications and affidavits filed before the Adjudicating Authority that the Formation has failed to implement the approved Resolution Plan. The Adjudicating Authority has also observed that Appellant has failed to implement the Resolution Plan. There was sufficient material on record to hold that Applicant Formation failed to implement the Plan which is clearly proved and beyond any pale of doubt. Whether the amount of PBG and earnest money has to be adjusted in the equity infusion which was required to be made by the SRA under the Resolution Plan had the PBG lost its nature and character to enable the CoC to invoke the PBG after the RP s treated it towards equity infusion? - HELD THAT - The Minutes of the Financial Creditor does not help the Appellant to contend that payment of PBG towards was for equity infusion. The equity infusion is clear consideration which is to be paid by the SRA as per Resolution Plan and is clearly distinct from PBG. Hence the submission of the Appellant that the PBG having been accepted towards equity infusion the PBG lying with the CoC has lost its character and could not have been invoked cannot be accepted. PBG given by the Appellant SRA was as per the RFRP had to continue till 100% implementation of the Resolution Plan and the said PBG cannot be treated as equity infusion as per the Resolution Plan. Whether the RP was obliged under Section 29 read with Regulation 36 sub-regulation (2) of the CIRP Regulations 2016 to include the Transaction Audit Report in the Information Memorandum and share the same to Formation failure of which makes the implementation of the Resolution Plan voidable? - HELD THAT - The present is not a case where Appellant s case is that the financial statement and audited financial statement of the corporate debtor of the last two financial years have not been provided. It is also not the case that provisional financial statement for the current financial year made upto the date not earlier than 14 days from the date of the application has not been provided - The findings of the adjudicating authority that RP and CoC did not inform the applicant Formation of forensic audit report and the application under Section 60(6) having direct effect on the financial position of the corporate debtor they come in the purview of relevant information under estimation to Section 29 cannot be supported. The Formation cannot raise any issue regarding non-sharing of transaction audit report or not including the transaction audit report in the information memorandum for wriggling out from its obligation in the resolution plan which had approved by the adjudicating authority on 30.11.2018. The finding of the adjudicating authority returned in paragraph 61 that non-disclosure of the above information performance of terms of resolution plan becomes voidable is also an incorrect finding. Non-sharing of transaction audit report in no manner can affect implementation of the resolution plan and it is far fetched to hold that due to not sharing of the said transaction audit report the performance of the resolution plan became voidable. There is material on record to indicate that earnest money was invoked in October 2018 itself by the CoC on Formation not extending the EMD as per provisions of the Process Memorandum. The PBG was invoked on 10.12.2019. Whether the RP had not provided the correct financial position of the CD to RA due to which performance of Resolution Plan became voidable? - HELD THAT - The judgment of the Hon ble Supreme Court in Ebix Singapore 2021 (9) TMI 672 - SUPREME COURT clearly binds SRA from its obligation and it cannot be allowed to wriggle out there its obligation as sought to be made in the present case. The submission which has been raised by learned counsel for the Formation distinguishing the judgment of the Hon ble Supreme Court in Ebix Singapore have no substance. When the plan is approved by the adjudicating authority obligations on the SRA to implement the plan becomes obligation which are to be statutorily enforced. Thus on the said ground the judgment of the Hon ble Supreme Court in Ebix Singapore cannot be distinguished nor SRA can be allowed to wriggle out from its obligation on the exclusion and pretext as was raised before the adjudicating authority. Adjudicating Authority committed an error in holding that due to not providing correct financial provisions of the corporate debtor to resolution applicant performance of the resolution plan became voidable. The said findings are incorrect findings and has been recorded without correct appreciation of facts and law. Whether the Formation had made out a case for direction to refund the amount of Rs. 93.08 crores and the order of Adjudicating Authority directing such refund is sustainable? - HELD THAT - The Bank has forfeited the PBG and EMD which was earlier done in October 2018. Thus only the aforesaid two amounts were forfeited by the CoC which was rightly forfeited by the CoC which could not have been directed to be refunded by the CoC. With regard to Rs.38.2 crores which by adding interest was kept in fixed deposit of Rs.42.99 crores orders were required for utilization of the said amount. We thus are of the view that order of Adjudicating Authority of 06.07.2023 insofar as it directed refund of the EMD and PBG cannot be sustained and it deserve to be set aside. With regard to other part of the amount of Rs.38.2 crores which was subsequently kept in fixed deposit of Rs.42.99 crores orders were necessary to be passed for utilization of the said amount. The direction of adjudicating Authority to refund 93.82 Crore to the Formation cannot be upheld and the said direction need to be set aside subject to further orders in this batch of appeals which need to be considered while considering the appeals filed by Interim Trade Creditors. Whether the Application filed by the RP as well as Application filed by Interim Trade Creditors (who are Appellant before us) were maintainable before the Adjudicating Authority in view of the approval of Resolution Plan of DLH on 19.05.2021 and Adjudicating Authority has rightly taken the view that Application of Interim Trade Creditors has to be decided in appropriate proceedings and not by Adjudicating Authority? - Whether Interim Trade Creditors had made out a case for issuing a direction to make payment of their outstanding amount of Rs. 20.09 crores towards goods and services provided to CD when it was under control of the Formation? - HELD THAT - The application by Interim Trade Creditors were filed before the adjudicating authority in the same CIRP proceedings where the Interim Trade Creditors has supplied goods and services to the corporate debtor at the time when it was in the control and management of Formation - It is true that after the approval of the resolution plan by the Formation Formation took control and management of the corporate on 30.01.2019 and the steps taken by the SRA under which it could not implement the resolution plan was subject matter of various application filed before the adjudicating authority which applications were entertained and decided by adjudicating authority by various orders as noted above. The application filed by Interim Trade Creditors were also one said of such application which was filed for payment of their outstanding dues arising out of goods and services supplied to the corporate debtor. There was no occasion for Interim Trade Creditors to file its claim the adjudicating authority being conscious of the liability which was incurred by the Formation during the period it had control and management has noted liabilities of Rs.22.53 Crore out of which only Rs.1.63 Crore was paid in the resolution plan. It was due to the above reasons that liberty was reserved to the Interim Trade Creditors and direction was issued to keep the amount of Rs.42.99 Crore in the fixed deposit. The application filed by Interim Trade Creditors was occasion for the Adjudicating Authority to consider the application. Adjudicating authority with regard to application filed by RP Charu Desai observes that after approval of the resolution plan RP has become functus officio hence the application is infructuous. The application filed by Interim Trade Creditors deserves to be allowed and respondents are directed to pay the balance outstanding amount of Rs.20.9 Crore from the fixed sum of Rs.42.99 Crore which is lying in the fixed deposit with the CoC. The CoC shall take steps to discharge the said amount - after discharging the dues of Interim Trade Creditors of Rs.20.9 Crores along with the interest earned on it the balance amount of Rs.42.99 Crore which was kept in the fixed deposit towards amount infused by the Formation thus rest of the amount along with interest earned on it need to be refunded to the Formation i.e. amount of Rs.22.09 Crore with interest earned on it. Whether Formation was entitled to claim interest @ 12% as prayed in IA No.443 of 2021? - HELD THAT - As per the provisions of Process Memorandum no consideration as per the Resolution Plan can be set-off with the equity requirement. There being specific clause in the Process Memorandum the case of Formation that the payment of earnest money towards PBG could be treated towards equity payment cannot be accepted. Further insofar as the emails which were sent by the RP and the CoC asking the Formation to pay balance amount of Rs.21 crores towards the equity suffice it to say that both RP and CoC have taken a stand that Formation has not paid the balance amount of equity. In this reference the letter written by Bank of Baroda to Formation dated 04.04.2019 is referred to in which letter the Bank of Baroda clearly informed that Formation has paid only Rs.38.82 towards part payment of FTL s equity component under the Resolution Plan as well as for purposes of buying out the Financial Creditor s share of the equity held in MIL. Further Bank of Baroda on 22.07.2019 has written to National Stock Exchange informing that SRA has not been able to make payment towards equity hence shares be not allotted. The Formation has not paid entire amount which was required to be paid in the equity. Hence the claim of interest @ 12% cannot be accepted - The said Section 42 was with respect to provisions in the Companies Act pertaining to share on a private placement basis. The above provision cannot be pressed into service where equity is required to be provided under the Resolution Plan. The consequence of providing or not providing the equity has to be read from Resolution Plan itself. Hence the provision of Section 42 sub-section (6) cannot be pressed by the Formation. The prayer of the Formation for claiming interest @ 12% could not have been granted. Whether the Adjudicating Authority is right in observing that in view of the order passed in IA 443 of 2021 there is nothing to adjudicate in IA No.1847 of 2021 filed by the Bank of Baroda and if not what relief to be granted to the Bank of Baroda in IA No.1847 of 2021? - HELD THAT - The law is well settled that insofar as breach of any undertaking or Clauses which provide for forfeiture of any amount there is no question of referring to Section 74 of the Indian Contract Act 1872 and the said amount can be awarded. However when damages or loss is difficult to prove Court is empowered to award liquidated amount - The Hon ble Supreme Court in Kailash Nath Associates vs. Delhi Development Authority and Anr. 2015 (1) TMI 1377 - SUPREME COURT has clarified the law. The Adjudicating Authority on breach of any terms and conditions by the SRA could very well have directed for payment of amount which is contemplated in the Process Memorandum under which the Resolution Plan is submitted - the Adjudicating Authority could not have proceeded to adjudicate about the compensation or damages which are not liquidated damages in exercise of jurisdiction under Section 60 sub-section (5) (c) of the IBC. Conclusion - i) Invocation of PBG by CoC was valid and sustainable. ii) The SRA failed to implement the approved Resolution Plan. iii) PBG and EMD cannot be adjusted against equity infusion. iv) Non-disclosure of Transaction Audit Report did not vitiate the Resolution Plan. v) Refund of Rs. 93.82 crores to SRA is not sustainable except for balance equity infusion amount in fixed deposit. vi) Interim Trade Creditors are entitled to payment of Rs. 20.9 crores from fixed deposit. vii) SRA not entitled to 12% interest on refund. viii) Bank of Baroda s claim for compensation is not maintainable under IBC. Appeal disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals arising from the Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor include:

(1) Whether the Committee of Creditors (CoC) was empowered under the Process Memorandum (March 2018) to invoke the Performance Bank Guarantee (PBG) on 10.12.2018, and whether such invocation was sustainable;

(2) Whether the Adjudicating Authority's finding that the CoC and Resolution Professional (RP) had not treated the approved Resolution Plan as contravened by the Successful Resolution Applicant (SRA) was supported by the material on record;

(3) Whether sufficient material was placed by the CoC and RP to establish that the SRA failed to implement the approved Resolution Plan;

(4) Whether the PBG and earnest money deposit (EMD) could be adjusted against the equity infusion required under the Resolution Plan, thus losing their character and precluding invocation by the CoC;

(5) Whether the RP was obliged under Section 29 of the Insolvency and Bankruptcy Code (IBC) read with Regulation 36(2) of the CIRP Regulations to include the Transaction Audit Report in the Information Memorandum and share it with the SRA, and whether failure to do so renders the Resolution Plan voidable;

(6) Whether the RP failed to provide the correct financial position of the Corporate Debtor (CD) to the SRA, thus voiding the performance of the Resolution Plan;

(7) Whether the SRA was entitled to a refund of Rs. 93.08 crores and whether the Adjudicating Authority's order directing such refund was sustainable;

(8) Whether the applications filed by the RP and Interim Trade Creditors (ITCs) were maintainable after approval of the subsequent Resolution Plan of Dev Land & Housing Pvt. Ltd. (DLH) on 19.05.2021, and whether the Adjudicating Authority rightly held that the ITCs' applications had to be decided in separate proceedings;

(9) Whether the ITCs were entitled to a direction for payment of their outstanding dues of Rs. 20.9 crores for goods and services supplied when the CD was under the control of the Formation;

(10) Whether the SRA was entitled to claim interest at 12% per annum on the refund amount as prayed;

(11) Whether the Adjudicating Authority was correct in observing that there was nothing to adjudicate in the Bank of Baroda's IA No.1847 of 2021 in view of the order passed in IA No.443 of 2021, and if not, what relief was due to the Bank of Baroda;

(12) What reliefs the appellants are entitled to.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Invocation of Performance Bank Guarantee (PBG)

The Process Memorandum (RFRP) issued in March 2018 prescribed the terms relating to the PBG. Clause 10.2.1 required the SRA to furnish an unconditional and irrevocable PBG of Rs. 50 crores within seven days of issuance of Letter of Intent (LoI). Clause 14.2 allowed invocation of the PBG if the implementation of the Resolution Plan was not complete within 12 months, subject to CoC approval. Clause 14.6 further empowered the CoC to invoke the PBG if the SRA breached any conditions of the LoI or Resolution Plan or failed to implement the Plan to the satisfaction of the CoC.

The CoC invoked the PBG on 10.12.2019 due to the SRA's failure to implement the approved Resolution Plan, as communicated by the RP via email dated 17.01.2020. The Tribunal held that the invocation was fully in accordance with Clauses 14.2, 14.6, and 15.4 of the Process Memorandum. The SRA's contention that invocation was not covered by any clause was rejected. The invocation was thus sustainable.

Issues 2 and 3: Whether the CoC and RP Treated the Resolution Plan as Contravened and Whether Sufficient Material Established Failure to Implement

The Adjudicating Authority had found that the CoC and RP did not treat the Resolution Plan as contravened by the SRA and allowed the SRA to exit the CIRP. However, the Tribunal reviewed the record and found ample evidence that both CoC and RP had consistently contended that the SRA failed to implement the Plan. Applications filed by the CoC and RP sought directions for implementation or alternate remedies including liquidation. The Adjudicating Authority's finding was thus unsustainable. The Tribunal referred to the order dated 05.12.2019 and the order dated 19.05.2021 where the Adjudicating Authority had observed that the SRA failed to implement the Plan and dismissed frivolous applications by the SRA. The Tribunal concluded that sufficient material existed to establish failure to implement the approved Plan.

Issue 4: Adjustment of PBG and EMD Against Equity Infusion

The SRA argued that the PBG and EMD had been treated as part of the equity infusion under the Resolution Plan, thus losing their character as guarantees and precluding invocation. The Tribunal referred to Clause 14.8 of the Process Memorandum, which expressly prohibits the PBG from being set off or used as part of the consideration offered by the SRA, even if indicated in the Resolution Plan. The Tribunal also relied on a recent Supreme Court judgment holding that the PBG must be kept alive until full implementation and cannot be adjusted against payments due from the SRA. The Tribunal rejected the SRA's submission, holding that the PBG and EMD remained separate and could be invoked for non-implementation.

Issue 5: Obligation of RP to Include Transaction Audit Report in Information Memorandum

The SRA contended that the RP was obliged under Section 29 of the IBC and Regulation 36(2) of the CIRP Regulations to include the Transaction Audit Report (for identification of avoidance transactions) in the Information Memorandum and share it with the SRA, and failure to do so rendered the Plan voidable. The RP countered that the Transaction Audit Report was commissioned for internal purposes to identify avoidance transactions and was not mandated to be shared or included in the Information Memorandum. The Tribunal analyzed the statutory provisions and found that the Information Memorandum must include relevant information such as financial statements, assets, liabilities, litigation, etc., but the Transaction Audit Report was not part of this mandatory disclosure. Further, Regulation 35A requiring sharing of avoidance applications was inserted after the Plan approval. The Tribunal held that non-disclosure of the Transaction Audit Report did not vitiate the Plan or make its performance voidable.

Issue 6: Whether RP Provided Correct Financial Position of CD to SRA

The SRA alleged that inflated financials were provided, which affected its ability to implement the Plan. The Tribunal noted that the financials included in the Information Memorandum were prepared by the ex-management and made available to all Resolution Applicants. Clause 3.2(a) of the Process Memorandum required the Resolution Applicant to conduct independent due diligence and accept the risk of inaccuracies. The Tribunal also relied on a Supreme Court judgment rejecting claims of fraud or misinformation where the Resolution Applicant had access to data and was advised by experts. The Tribunal held that the SRA's claim was a mere excuse to avoid obligations and that the RP was not liable for the ex-management's financial statements.

Issue 7: Refund of Rs. 93.08 Crores to SRA and Sustainability of Adjudicating Authority's Order

The Adjudicating Authority had allowed the SRA's IA No.443 of 2021 directing refund of Rs. 93.82 crores (including PBG, EMD, and equity infusion) with interest. The Tribunal set aside this direction except for Rs. 22.09 crores (equity infusion amount kept in fixed deposit with interest). The Tribunal held that invocation of PBG and EMD was lawful and could not be refunded. The equity infusion amount was distinct and had not been fully paid by the SRA as per the Plan; hence, the refund of the balance equity infusion was justified. The Tribunal noted that the amount of Rs. 42.99 crores was kept in fixed deposit under earlier orders and directed that after payment of dues to Interim Trade Creditors, the balance be refunded to the SRA.

Issues 8 and 9: Maintainability of Applications by RP and Interim Trade Creditors and Payment of Outstanding Dues

The Interim Trade Creditors (ITCs) filed applications for payment of Rs. 20.9 crores due for goods and services supplied during the period when the CD was under the control of the Formation. The Adjudicating Authority rejected these applications, holding that the claims should be decided in separate proceedings and that the ITCs should have challenged the approval of the DLH Plan. The Tribunal disagreed, noting that the ITCs' claims arose from the CIRP period under Formation's control and were within the jurisdiction of the Adjudicating Authority. The Tribunal held that the Adjudicating Authority abdicated its jurisdiction by refusing to consider the claims on merits. The Tribunal directed the CoC to pay the ITCs from the fixed deposit amount of Rs. 42.99 crores within 30 days. After payment of Rs. 20.9 crores plus interest, the balance amount with interest was to be refunded to the Formation.

Issue 10: Entitlement of SRA to Interest @ 12%

The SRA claimed interest at 12% per annum on the refund amount under Section 42(6) of the Companies Act, 2013, which mandates interest on application money if securities are not allotted within 60 days. The Tribunal rejected this claim on two grounds: (i) the SRA had not fully paid the equity infusion amount required under the Plan; (ii) Section 42(6) applies to private placement offers under the Companies Act and cannot be invoked in the context of equity infusion under a Resolution Plan. The Tribunal held the SRA was not entitled to interest at 12%.

Issue 11: Adjudicating Authority's Disposal of Bank of Baroda's IA No.1847 of 2021

The Bank of Baroda filed IA No.1847 of 2021 seeking compensation of Rs. 249 crores for losses caused by non-implementation of the Resolution Plan, interest on continuing debt, litigation costs, and other damages. The Adjudicating Authority disposed of the application relying on its order in IA No.443 of 2021, holding there was nothing to adjudicate. The Tribunal upheld the dismissal, observing that the IBC does not empower the Adjudicating Authority to award damages or compensation beyond liquidated damages or forfeiture under the Process Memorandum. The Tribunal noted that the Bank of Baroda's claim for compensation was not a liquidated amount and thus beyond the Adjudicating Authority's jurisdiction under Section 60(5)(c) of the IBC.

3. SIGNIFICANT HOLDINGS

"Clause 14.6 of the Process Memorandum contemplates invocation of the Performance Guarantee on failure of the Successful Resolution Applicant to implement the Resolution Plan to the satisfaction of the Committee of Creditors."

"The Performance Guarantee shall not be set-off against or used as part of the consideration that the Successful Resolution Applicant proposes to offer in relation to the Company, even if expressly indicated as such by the Resolution Applicant in the Resolution Plan." (Clause 14.8)

"The non-disclosure of the Transaction Audit Report in the Information Memorandum does not render the performance of the Resolution Plan voidable."

"The Resolution Applicant is bound by the approved Resolution Plan and cannot wriggle out of its obligations on the ground of alleged non-disclosure or inflated financials, especially where it had access to the Information Memorandum and Data Room and was advised by financial experts."

"The Committee of Creditors and the Resolution Professional had consistently treated the SRA as having contravened the Resolution Plan by failing to implement it, and there was sufficient material on record to establish such failure."

"The invocation and forfeiture of the Performance Bank Guarantee and earnest money deposit by the Committee of Creditors was lawful and in accordance with the Process Memorandum."

"The Adjudicating Authority erred in directing refund of the entire Rs. 93.82 crores to the SRA; only the balance equity infusion amount kept in fixed deposit with interest is refundable after payment of dues to Interim Trade Creditors."

"The Interim Trade Creditors are entitled to payment of their outstanding dues from the fixed deposit amount infused by the SRA, and the Adjudicating Authority erred in rejecting their applications on the ground of maintainability."

"The SRA is not entitled to interest at 12% under Section 42(6) of the Companies Act, 2013 on the refund amount."

"The Adjudicating Authority has no jurisdiction under the IBC to award compensation or damages beyond liquidated damages or forfeiture as provided in the Process Memorandum."

Final determinations:

- Invocation of PBG by CoC was valid and sustainable.

- The SRA failed to implement the approved Resolution Plan.

- PBG and EMD cannot be adjusted against equity infusion.

- Non-disclosure of Transaction Audit Report did not vitiate the Resolution Plan.

- Refund of Rs. 93.82 crores to SRA is not sustainable except for balance equity infusion amount in fixed deposit.

- Interim Trade Creditors are entitled to payment of Rs. 20.9 crores from fixed deposit.

- SRA not entitled to 12% interest on refund.

- Bank of Baroda's claim for compensation is not maintainable under IBC.