2022 (5) TMI 460 - AT - Insolvency and Bankruptcy

Validity of approved Resolution Plan - mismatch in the liquidation value and fair value arrived at by two registered valuers - value arrived by the third valuers nearly half the value arrived by the two registered valuers previously - it is alleged that the resolution plan approved by the Impugned Order has resulted in transfer of the business of the company at a value which is much below its actual worth causing loss to all the stakeholders including the creditors - HELD THAT - In the instant case, the first valuation by two registered valuers were made on 28.5.2018 and the two valuations of liquidation value were Rs.126.30 crores and Rs.121.01 crores, leading to average value of Rs.123.66 crores. Even if the CoC thought it fit to get another valuation of a more recent date, it was desirable that the procedure outlined in regulations 27 and 35 should have been followed. The source of payment for valuation is not a material factor insofar as valuation figures are concerned nor will they have any impact on them. They are really disjointed activities. Moreover, in the present case the third valuation estimates the liquidation value as Rs. 52.69 crores, which is even less than half of the liquidation value estimated earlier and hence significantly different from the two earlier valuations. Thus, the procedure of obtaining a third valuation and then considering it as basis for deciding the payment particularly of the operational creditors under Section 30(20(b) defective and not in accordance with the stipulated norms and procedure under the CIRP Regulations. The CoC did consider the variance between the two earlier liquidation valuation estimates and the third one and desired explanation regarding the same. The explanation could have been obtained from the three valuers since they had carried out the valuation exercise and would be in a position to explain the methodology and reason for divergence in values. It, therefore, appears surprising that rather than obtain explanation from the earlier valuers, the CEO of the erstwhile corporate debtor, who would have been an interested party and could have had a clouded opinion, was approached to provide this explanation. We do not think such an explanation would be fair and free from being coloured with possible conflict of interest. Therefore, taking it as the basis for calculating payments under the resolution plan cannot be considered as an error-free exercise - it is quite clear that the members of the CoC had concerns about the appointment of the third valuer and later about the low liquidation value in the third report. The Resolution Profession also expressed an opinion about the low liquidation value obtained in the third report. The detailed discussion regarding the third valuation report on fair and liquidation value and the approval of resolution plan of Rs. 54.02 crores make it clear that the quantum of liquidation value was relevant and material in allocating payments to be given to the workmen, employees and the operational creditors. The third valuation report of fair and liquidation should be discarded as it is not in accordance with the stipulated provision and procedure in the CIRP Regulations, and moreover the wide variance of the liquidation value of the third valuation report from the first two valuation reports also necessitates discarding of the third valuation report. Therefore, the average liquidation value of first two valuations viz. Rs. 123.66 crores should be the liquidation value on which various payments in the resolution plan should be based upon. The impugned order and the resolution plan set aside only to the extent it relates to allocation of payments to the stakeholders and creditors and direct that the revision of payments and subsequent approval of the revised resolution plan should be completed within a period of two months from the date of this judgment - appeal disposed off.

Issues Involved:
1. Validity of the third valuation of liquidation value.
2. Adherence to the Insolvency and Bankruptcy Code (IBC) and CIRP Regulations in the valuation process.
3. Impact of the forensic audit report on the resolution plan.
4. Consideration of pending applications involving recovery of significant amounts.
5. Commercial wisdom of the Committee of Creditors (CoC) in approving the resolution plan.

Issue-wise Detailed Analysis:

1. Validity of the Third Valuation of Liquidation Value:
The third valuation report was challenged on the grounds that it was not conducted according to the stipulated procedure in the CIRP Regulations. The first two valuations, conducted by M/s. Jagdish Mistry and M/s. Parag Seth, estimated the liquidation values at Rs. 126.30 crores and Rs. 121.01 crores respectively. The third valuation estimated the liquidation value significantly lower at Rs. 52.69 crores. The tribunal found that the third valuation was not justified and was significantly different from the first two valuations. The tribunal concluded that the third valuation should be discarded, and the average of the first two valuations (Rs. 123.66 crores) should be considered for determining the payments to creditors and stakeholders.

2. Adherence to the Insolvency and Bankruptcy Code (IBC) and CIRP Regulations in the Valuation Process:
The tribunal noted that the appointment of registered valuers and the process of obtaining valuations should strictly follow Regulations 27 and 35 of the CIRP Regulations. The CoC's decision to obtain a third valuation without following the stipulated procedure was found to be improper. The tribunal emphasized the importance of adhering to the regulations to ensure the accuracy and fairness of the valuation process, which forms the basis for the resolution plan and payments to creditors.

3. Impact of the Forensic Audit Report on the Resolution Plan:
The forensic audit report, which highlighted several irregularities, was not presented before the Adjudicating Authority. The tribunal found that the forensic audit report, available on 20.1.2021, should have been considered before approving the resolution plan. The report could have potentially impacted the resolution plan by revealing additional assets or irregularities that needed to be addressed, thereby affecting the payments to creditors and stakeholders.

4. Consideration of Pending Applications Involving Recovery of Significant Amounts:
Three pending applications (CA Nos. 235/2018, 236/2018, and 237/2018) involving claims totaling approximately Rs. 85 crores were not appropriately adjudicated by the Adjudicating Authority. The tribunal noted that these applications should have been decided before finalizing the resolution plan, as their outcomes could have significantly impacted the resolution plan's structure and payments to creditors.

5. Commercial Wisdom of the Committee of Creditors (CoC) in Approving the Resolution Plan:
The tribunal acknowledged the importance of the CoC's commercial wisdom in approving the resolution plan. However, it emphasized that the CoC's decisions must be based on accurate and fair valuations and comply with the IBC's provisions. The tribunal found that the CoC's approval of the resolution plan, based on the flawed third valuation, was not in line with the IBC's requirements.

Conclusion:
The tribunal set aside the impugned order and the resolution plan to the extent it related to the allocation of payments to stakeholders and creditors. It directed the Successful Resolution Applicant (SRA) to revise the payments based on the average liquidation value of Rs. 123.66 crores and seek approval from the CoC within two months. The tribunal also directed the Adjudicating Authority to dispose of the pending applications within the same period and consider any additional amounts recovered in the revised payments. The appeals were disposed of with these directions, and the parties were to bear their own costs.

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