2020 (7) TMI 296 - Tri - Insolvency and Bankruptcy

Liquidation of Corporate Debtor - assignemnet of debt by Operational Creditor - section 5 of SARFAESI Act 2002 - going concern or not - HELD THAT - The crucial aspect which is noticed is the term going concern . Admittedly it has not been defined in the Code though used at many places hence to find out the meaning of going concern we have to look into the dictionary accounting literature and judicial decision An organisation is normally viewed as a going concern when it will be running business or continuing operations for a foreseeable future and such organization has neither any intention nor any compulsion or necessity of shutting down or reducing the scale of operations in a substantial manner. Further going concern also implies ability of a business to meet its financial obligations. Thus in the event of either business failure or financial failure question mark is raised on the status of a business entity - The company was incorporated way back in 1920 for the manufacture of various kinds of electrical cables wires and conductors radio frequency cables equipment wires high temperature cables for domestic and industrial use and for sophisticated applications in defence electric electronic and space research in India. Commercial production was started in 1923. Expansions also took place from time to time and in 1970 a factory was acquired in Pune. In fact upto a certain period corporate debtor was the only private sector unit which used to manufacture almost all the cables at its Jamshedpur and Pune factories. It is also noted that besides the conventional type of cable accessories and specialised materials related thereto for jointing and terminating the cables were also manufactured. The company was profitable till 1991. Subsequently it started incurring losses and during 1993-1996 there was a virtual stalemate in the company s operations. Jamshedpur plant was closed down completely for 34 months. The corporate debtor is not a going concern particularly when vast technological changes have taken place over a period of last 25 years and the plant and technology in possession of the corporate debtor are obsolete out-dated and beyond repair/renovations due to depletion thereof. To put it in simple words corporate debtor is not a going concern but already a gone concern. Whether corporate debtor can be or should be made a going concern? - HELD THAT - It is an undisputed legal position that IRP is appointed when CIRP is initiated against the corporate debtor by the order of the Adjudicating authority and such IRP is made responsible to manage the operations of corporate debtor as a going concern hence what is most crucial is that as on the date of initiation of CIRP corporate debtor should be a going concern. This is not the case here hence to say that it should be continued as a going concern when it is not so nor there appears to be any possibility of the (sic) due to reasons mentioned by CoC while passing the resolution for liquidation which have been listed - Although the Code implies that only a going concern at the date of initiation of CIRP should be made to run as such subject to conditions imposed in the IBC 2016 however if CoC provides necessary interim finance and other requisite infrastructure is put in place then there is no bar that a closed concern cannot be made operational or a going concern. Though it is easy to say but a herculean task in reality but it remains a possibility and depends upon the willingness of all the parties involved in the resolution of insolvency of a corporate debtor in a most beneficial manner to all. The status of the corporate debtor need not be made as a going concern as there is no legal necessity to do so mandatorily. However as mentioned earlier if the lenders wish to do so voluntarily they can do so. Role and power of CoC - HELD THAT - The basic structure of the IBC 2016 is based on the theme of creditors in control. Therefore the CoC has been empowered to exercise its jurisdiction in espect of all the key matters during CIRP without any interference as far as its commercial wisdom is concerned. The only restriction is that any activity/decision of CoC should not be in contravention or violation of any law for the time being in force. The role of Adjudicating Authority to disturb the decisions of CoC is very limited in scope and its obligation is further circumscribed by explicit provisions of IBC 2016 giving extensive jurisdiction to CoC in respect of all crucial decisions. As far as taking care of interest of workmen/employees being operational creditors no doubt liquidator is supposed to dispose of the assets as a package in terms of provisions of Regulation 32 and 32A of IBBI (Liquidation Process) Regulations 2016 read with Regulation 39C of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016 keeping in mind such objective along with maximisation of value for all stakeholders. Having said so we are of the view that commercial wisdom of CoC cannot be challenged as it is basic instinct of the Code and this has been held so in the case of K. Sashidhar and aforesaid decision also. Whether the process of passing such resolution can be said to be fair and reasonable? - HELD THAT - In the present case it is not in dispute that financial statements have not been prepared after the year 1999. The statutory records and other accounting records at different locations are not available to the extent to enable the resolution professional to prepare the accounts for which efforts had been done as mentioned in the various progress reports filed after initiation of CIRP. The claims by the creditors have been verified mostly from their own records or through the records of the third parties - information memorandum if prepared would not have served any purpose. Further in the first four CoC meetings it has been submitted that efforts were made to prepare Information Memorandum. However once a decision has been taken by CoC for liquidation then preparation of information memorandum loses all its significance as liquidator has to prepare asset memorandum. After taking into consideration the applicable legal position and carefully analysing the facts of conducting of CIR Process including meetings of CoC and the fact that progress reports of all minutes of such meetings have been filed with this Authority as per the relevant Regulation we hold that there is no lacunae or non-compliance in regard to following of process. Further all other lenders who are financial institutions and also have substantial stake by way of outstanding debts have also consented to the proposal made by CoC. Thus for this reason also there remains no scope for us to have a limited judicial review of such actions. Consequence of order of liquidation - HELD THAT - The group of assets and liabilities have not been identified for sale as a going concern under Regulation 32(e) or 32(f). This leads to a situation where now liquidator has to act for sale as a going concern under Regulation 32(e) and 32(f) as per the provisions of Regulation 32A(3) of the Liquidation Process Regulations 2016 and he shall identify the group of assets and liabilities in consultation with the Consultation Committee to be sold as a going concern. Thereafter if such process does not yield any result then the liquidator shall be at liberty to realise assets in terms of provisions of regulation 32(a) to 32(d) of Liquidation Process Regulations 2016. Whether in the facts and circumstances of the case the corporate debtor or its business or any part thereof be sold as a going concern if the order of liquidation is passed? - HELD THAT - Only a large corporate having entrepreneurial instincts coupled with a necessity to establish a unit suitable to his corporate requirements may come forward. Since it is very hard to conceive as to how the undertaking which comprises of only land and workers could be useful to him. Thus it is the intention of the acquirer that would be the deciding factor for disposal of the corporate debtor or its assets as a going concern. This business paradigm needs to be passed through the legal mechanism prescribed under the IBC 2016. Though we have already held that it is not a going concern hence it cannot be run as a going concern by RP and liquidator is required to run the unit only for its beneficial liquidation but there is no bar also if somebody comes and wants to start an industrial activity with the help of the assets of the corporate debtor or in the name and style of the corporate debtor as well. Validity of assignment - HELD THAT - The fact which is noticeable even in petition filed under section 9 on 28-11-2018 and no aggrieved party filed any interlocutory application to raise this issue as it would have an impact on the composition of CoC if the corporate debtor was admitted into CIRP. Thus prima facie this issue has been closed by the parties by their own conduct and cannot be raised now. All pleas of all parties regarding validity of assignment are rejected and dismissed both on the ground of maintainability as well as on merits - Corporate Debtor is liquidated - moratorium shall cease to have effect.

Summary

Issues Involved:
1. Impleading the Government of Jharkhand in the CIRP proceedings.
2. Validity of the Resolution Professional’s actions.
3. Decision to liquidate the Corporate Debtor.
4. Validity of debt assignments and related party transactions.
5. Workers' and operational creditors' objections to the liquidation process.

Analysis:

1. Impleading the Government of Jharkhand in the CIRP proceedings:
The applicant sought to implead the Government of Jharkhand, arguing that the land in question belonged to the government and was central to the resolution of the corporate debtor's insolvency. The Tribunal concluded that the issue of land ownership between Tata Steel Ltd. and the Government of Jharkhand was outside its jurisdiction, as it was not directly connected to the insolvency resolution or liquidation process. The Tribunal relied on the Supreme Court's decision in Embassy Property Developments (P.) Ltd. v. State of Karnataka, which demarcates the boundaries of the Adjudicating Authority's role. Consequently, the Tribunal rejected the contention to implead the Government of Jharkhand.

2. Validity of the Resolution Professional’s actions:
The Tribunal examined the actions of the Resolution Professional (RP) and found no negligence or non-compliance with the Insolvency and Bankruptcy Code (IBC), 2016. The RP had made efforts to prepare the Information Memorandum despite the lack of statutory records and cooperation from suspended directors. The Tribunal noted that the RP's actions were in line with the Code's requirements and that the RP had sought necessary approvals from the Committee of Creditors (CoC).

3. Decision to liquidate the Corporate Debtor:
The CoC decided to liquidate the Corporate Debtor due to several reasons, including the non-operational status of the business, outdated technology, lack of financial records, and expired lease of land. The Tribunal upheld the CoC's decision, emphasizing that the commercial wisdom of the CoC is supreme and should not be interfered with unless it contravenes any law. The Tribunal also noted that the corporate debtor was not a going concern and that liquidation was the only viable option.

4. Validity of debt assignments and related party transactions:
The Tribunal addressed the objections regarding the validity of debt assignments to Kamala Mills Ltd. and Fasqua Investment Pvt. Ltd., and whether these entities were related parties. It was concluded that the assignments were valid under the Transfer of Property Act, 1882, and that the Factoring Regulation Act, 2011, did not apply retrospectively. The Tribunal also found that Mr. Ramesh G. Govani was not a director of the corporate debtor, thus negating the related party argument. The Tribunal rejected the contention that only operational creditors could assign debts and upheld the inclusion of Kamala Mills Ltd. and Fasqua Investment Pvt. Ltd. in the CoC.

5. Workers' and operational creditors' objections to the liquidation process:
The Tribunal considered the objections raised by the workers and operational creditors, including the proposal to revive the company and the alleged bias of the RP. The Tribunal found that the workers' proposal was not concrete and that the RP had acted in accordance with the Code. The Tribunal emphasized that the interests of the workers would be protected during the liquidation process, and they could submit a proposal under Section 230 of the Companies Act, 2013, or to the Liquidator.

Conclusion:
The Tribunal ordered the liquidation of the Corporate Debtor, appointing Mr. Shashi Agarwal as the Liquidator. The Liquidator was directed to proceed with the liquidation process as per the IBC, 2016, and to prioritize the interests of the workers. The Tribunal dismissed all applications challenging the liquidation process and upheld the CoC's decision based on commercial wisdom.