2023 (5) TMI 344 - SC - Insolvency and Bankruptcy

Rejection of Resolution Plan - while rejecting matter remanded to the committee of creditors with directions to the resolution professional to proceed from the stage of publication of Form G and invite the expression of interest afresh as per the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 - ineligibility in terms of Section 88 of the Indian Trusts Act 1882. Valuation Regulations 27 and 35 - HELD THAT - It is at once clear that the members of CoC were fully satisfied with and endorsed the process of valuation and even re-evaluation as undertaken by the resolution professional. Particularly the minutes of second fourth sixth and seventh CoC meetings stand testimony to the fact that the requirements of Regulation were scrupulously followed and complied with and there had not been any doubt in CoC as regards the process of valuation as also supplying of fair and liquidation value to the members of CoC. The detailed findings of the Adjudicating Authority in this regard (reproduced in paragraph 15.1.1. hereinabove) make it clear that the Adjudicating Authority independently applied its mind to the process of valuation and presentation of the matter to CoC. Rejection of all the objections in that regard by the NCLT called for no interference. The Appellate Tribunal appears to have unnecessarily and rather unjustifiably presumed that there had been blatant statutory violations and irregularities. Even if certain issues were raised in some of the meetings of CoC as regards the process of valuation the clarifications from the resolution professional and the steps taken by him for valuation and re-valuation had been to the satisfaction of CoC. It has rightly been contended on behalf of the appellants with reference to the decision in Maharashtra Seamless 2020 (1) TMI 903 - SUPREME COURT that resolution plan is not required to match the liquidation value as such - The findings of the Appellate Tribunal in regard to the question of valuation and thereby taking the resolution plan to be in contravention of Sections 30(2) and 61(3) of the Code cannot be approved and are required to be set aside. Publication of Form G Regulation 36-A - HELD THAT - It has rightly been contended on behalf of the resolution professional that Form G was published in all leading newspapers on 09.08.2020 and then IBBI was also informed about technical issues in uploading the Form on the website. The Adjudicating Authority has also rightly observed that a statutory provision regulating a matter of practice or procedure would generally be read as directory and in the present case no prejudice has been shown by anyone as regards technical non-compliance of all the requirements of publication. Even if principles of res judicata are as such not applied fact of the matter remains that at the given stage the process as undertaken by the resolution professional had been consistently approved by CoC Adjudicating Authority and the Appellate Tribunal. Even otherwise as observed hereinabove there had not been any such illegality or material irregularity for which the entire process would have been considered vitiated. The findings of the Appellate Tribunal in this regard too cannot be approved and are required to be set aside. Effect of Section 164(2)(b) Companies Act - HELD THAT - Even if there had been any possibility of the resolution applicant incurring such a disqualification in terms of Section 164(2)(b) of the Companies Act because of alleged default of another company in which he is a director to refund the share application money the same would essentially be a matter of consideration of the registrar of companies. Unless a categorical finding was recorded in the competent forum as regards any such default and unless specific order disqualifying the resolution applicant as director because of such default came into existence it could not have been taken by way of any process of assumption that the appellant-resolution applicant was disqualified to act as a director and thereby was ineligible to submit a resolution plan. It has rightly been pointed out that when DIN status of the appellant was active compliant he could not have been treated as ineligible. Again it has been too far-stretched on the part of the Appellate Tribunal to refer to the Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules 2014 and then to make a declaration as if the resolution applicant was disqualified in terms of Section 164(2)(b) of the Companies Act. Although we do not agree with the submissions on behalf of appellant that such an issue of eligibility could not have been raised before NCLAT for the first time because the question of eligibility of the resolution applicant goes to the root of the matter but we do agree with the other part of the submission in this regard that there is no concept of deemed disqualification under Section 164(2)(b) of the Companies Act - the Appellate Tribunal had not been right in holding the resolution applicant ineligible by virtue of Section 164(2)(b) of the Companies Act. Point C1 is answered accordingly. Effect of Section 88 Trusts Act - HELD THAT - In view of the claim made by the resolution applicant himself coupled with the fact that in CIRP in question two resolution plans were submitted by this appellant one in individual capacity and another as managing director of the said trust it is difficult to detach him from the said resolution applicant-Sri Balaji Vidyapeeth. Hence it cannot be said that the Appellate Tribunal committed any error in observing that the appellant was attempting to act as alter ego of the said ineligible applicant (the trust); and the benefit from his own (individual s) resolution plan cannot escape the operation of Section 88 of the Trusts Act. Even if the appellant would assert that his financial capability was independent of trust money the fact of the matter remains that he projected the overall picture of his own profile while also relying on his status as Managing Trustee of the said trust Sri Balaji Vidyapeeth. Thus any pecuniary advantage gained by him under the resolution plan in question would be directly subsumed by operation of Section 88 of the Trusts Act. This would in all practical purposes bring about a position that what could not be done directly for the said trust was sought to be done by the appellant by way of this indirect methodology. The Appellate Tribunal has rightly held the resolution plan being in contravention of the provisions of law for the time being in force. Observations and findings of the Appellate Tribunal in paragraphs 106 to 112 of the impugned order dated 17.02.2022 (reproduced hereinabove in paragraph 19.4.2.) deserve to be and are approved. Effect of Section 166(4) Companies Act - HELD THAT - Section 166(4) of the Companies Act prohibits a director of a company from involving himself in a situation in which he may have a direct or even indirect interest that conflicts or may possibly conflict with the interest of the company. Given the status of the resolution applicant as Managing Director of MGM Healthcare Private Limited his dealing with property of the corporate debtor and converting the same into a hospital cannot be said to be having no impact on the activities of the said MGM Healthcare Private Limited. A direct conflict of interest being writ large on the face of the record it cannot be said that the prohibition in terms of Section 166(4) does not operate and the resolution plan does not stand in contravention of any of the provisions of law for the time being in force. For this reason too in our view the appellant-resolution applicant could not have been accepted as eligible applicant. Revision of resolution plan after approval by CoC - HELD THAT - Commercial wisdom of CoC is given such a status of primacy that the same is considered rather a matter non-justiciable in any adjudicatory process be it by the Adjudicating Authority or even by this Court. However the commercial wisdom of CoC means a considered decision taken by CoC with reference to the commercial interests and the interest of revival of the corporate debtor and maximization of value of its assets. This wisdom is not a matter of rhetoric but is denoting a well-considered decision by the protagonist of CIRP i.e. CoC. These observations read with the observations in Essar Steel 2019 (11) TMI 731 - SUPREME COURT with reference to the reasons stated in the report of Bankruptcy Law Reforms Committee of November 2015 make it clear that commercial wisdom of CoC is assigned primacy in CIRP for it represents collective business decision which is arrived at after thorough examination of the proposed resolution plan and assessment made with involvement of experts by the body of persons who are most vitally interested in rapid and efficient decision making. It follows as a necessary corollary that to be worth its name the commercial wisdom of CoC would come into existence and operation only when all the relevant information is available before it and is duly deliberated upon by all its members who have direct and substantial interest in the survival of corporate debtor and in the entire CIRP. The requirement of CIRP Regulations particularly of placing the resolution plan in its final form before the CoC has to be scrupulously complied with. No alteration or modification in the process could be countenanced. We say so for the specific reason concerning law that if the process as adopted in the present matter is approved the very scheme of the Code and CIRP regulations would be left open-ended and would be capable of inviting arbitrariness at any level. The minor procedural aspects which we have held to be not of material bearing hereinbefore and this aspect pertaining to approval of financial resolution plan by CoC stand at entirely different footing. The irregularity in the process of approval by CoC and filing before Adjudicating Authority are not the matters of such formal nature that deviation in that regard could be ignored or condoned. As stated above when commercial wisdom of CoC is assigned primacy it presupposes a considered decision on the resolution plan in its final form. The disapproval of the resolution plan by the Appellate Tribunal for want of presentation of final resolution plan before CoC remains unexceptionable and calls for no interference. Increase of fees of resolution professional - HELD THAT - The CoC had precisely deliberated over the question of increase of fees of resolution professional and its decision in that regard could not have been correlated with any shortcoming in the process undertaken which might have occurred for want of an erroneous assumption on the part of the resolution professional in view of the contents of minutes of ninth CoC meeting dated 22.01.2021 - when the resolution plan was to be revised so as to make provision for dissenting financial creditors the financial outlay was going to be altered and it ought to have been placed before CoC again but it is too far-stretched to connect this irregularity with the increase of fees of the resolution professional. The findings and observations of the Appellate Tribunal against resolution professional in this regard deserve to be set aside. The matter concerning related party - HELD THAT - There are no reason to discuss this matter any further when it is noticed that the promoter and erstwhile director the contesting respondent before us has been holding the position of Chairman of the said related party. Suffice it would be to observe for the present purpose that the Appellate Tribunal has erred in applying the principles of non-discrimination and thereby holding against the resolution plan in question for want of provision for related party. NCLAT s findings regarding settlement offer of promoter - HELD THAT - The proposal in question was forwarded for consideration only at the eleventh hour i.e. a day before CoC was to vote on the resolution plan in its ninth meeting. The CoC in the said meeting indeed took into consideration the proposition of settlement and application for withdrawal request letter which was circulated two hours before the meeting. The creditors with significant voting shares such as SBI and Bank of India were clear in their stand that they would stick to the agenda and would not deviate therefrom. The resolution professional had to request the representatives of the corporate debtor to allow the agenda items to go through as per the wishes of the majority of CoC and no further discussions were to be made on the letter sent to CoC. When the substantial majority of CoC was not in favour of such discussion which was proposed to be thrusted on them only a few hours before the meeting their approach cannot be faulted at - When the creditors with substantial voting share were against any such proposal any consideration was clearly ruled out and there could not have been any valid application for withdrawal. Thus the Appellate Tribunal has erred in holding that the settlement offer of the promoter in terms of Section 12-A was not placed for consideration of CoC. Approval of resolution plan in question could not have been reversed on this count. However as noticed hereinbefore approval of the resolution plan in question could not have been endorsed by the Appellate Tribunal because of other substantial reasons. Impact and effect of subsequent events - HELD THAT - When the resolutions plans had been received at the earlier stage only at the eleventh hour the settlement proposal came up. This time too the settlement proposal came up from the promoter only after resolution plans had been received. Prior to it his proposal had already been rejected. It gets perforce commented that the representative of the corporate debtor being a part of CoC such proposer is obviously in a position to know about the propositions in the resolution plans when received in response to invitation - when it is found that the settlement proposal of the promoter after approval of CoC for invoking the provisions of Section 12-A of the Code is pending before the Adjudicating Authority in our view it shall be in the fitness of things that all the relevant aspects of the matter are left open for consideration of the Adjudicating Authority including those relating to the justification for invoking Section 12-A after issuance of fresh invitation for EOI and after receiving resolution plans. In other words we would leave all the relevant aspects open for consideration of the Adjudicating Authority in accordance with law while keeping in view the observations of this Court. Summation Thus the disapproval of the resolution plan in question by the Appellate Tribunal (NCLAT) in the impugned order dated 17.02.2022 is not to be interfered with but not for all the reasons which weighed with the Appellate Tribunal. The reasons and findings of the Appellate Tribunal in relation to the valuation process and alleged non-compliance of some of the procedural provisions as also the observations against increase of fees of resolution professional (points A B and D2) are not to be approved. Similarly the Appellate Tribunal has not been right in holding the resolution applicant ineligible to submit a resolution plan with reference to Section 164(2)(b) of the Companies Act 2013 (as held in point C1). The disapproval by the Appellate Tribunal with reference to the settlement offer of promoter in terms of Section 12-A of the Code and its purported non-consideration is also not approved by us and such findings of the Appellate Tribunal are required to be set aside (as held in point F). Similarly the Appellate Tribunal has erred in applying the principles of non-discrimination in relation to the related party (as held in point E). However the other findings in relation to points C2 C3 and D1 and the consequential order passed by the Appellate Tribunal deserve to be approved. Putting it in different words we are clearly of the view that even while respecting the commercial wisdom of CoC in the present case the resolution plan in question could not have been approved by the Adjudicating Authority for two major reasons one for the ineligibility of the resolution applicant; and second for not placing of the revised resolution plan in the CoC before seeking approval from the Adjudicating Authority. Of course on the questions relating to the valuation reports and want of publication of Form G on the website we are at one with the Adjudicating Authority that these aspects were not of material bearing in the process in question and the resolution professional had taken reasonable steps as permissible in law and feasible in the circumstances. Similarly we are not inclined to endorse the views of the Appellate Tribunal regarding the treatment of related party in the resolution plan as also regarding the settlement offer of the promotor; and the process in that relation cannot be said to be suffering from any illegality. Appeal disposed off.

Summary

Issues Involved:
1. Valuation Process
2. Publication of Form G
3. Eligibility of Resolution Applicant
4. Revised Resolution Plan Approval
5. Increase in Fees of Resolution Professional
6. Treatment of Related Party
7. Settlement Offer of Promoter
8. Impact of Subsequent Events

Summary:

Valuation Process:
The Appellate Tribunal's findings on the valuation process were erroneous. The members of the Committee of Creditors (CoC) were provided with fair and liquidation values after obtaining confidentiality undertakings. The Adjudicating Authority independently verified the valuation process and found no errors. The resolution plan is not required to match the liquidation value. Thus, the findings of the Appellate Tribunal on valuation are set aside.

Publication of Form G:
The Appellate Tribunal's emphasis on non-compliance with Regulation 36-A(2)(iii) for not publishing Form G on the designated website was misplaced. Form G was published in leading newspapers and IBBI was informed about technical issues in uploading the form. The CoC's decision to proceed without re-publication was a commercial decision, and the process could not be annulled on such technicalities. The findings of the Appellate Tribunal on this issue are set aside.

Eligibility of Resolution Applicant:
- Section 164(2)(b) Companies Act: The resolution applicant was not disqualified under Section 164(2)(b) of the Companies Act as there was no specific order disqualifying him. The Appellate Tribunal's findings on this issue are set aside.
- Section 88 Trusts Act: The resolution applicant, being the Managing Trustee of an ineligible trust (Sri Balaji Vidyapeeth), cannot act as its alter ego. The resolution plan is in contravention of Section 88 of the Trusts Act. The Appellate Tribunal's findings on this issue are upheld.
- Section 166(4) Companies Act: The resolution applicant's proposal to convert the corporate debtor's property into a hospital conflicts with his role as Managing Director of another hospital chain, violating Section 166(4) of the Companies Act. The resolution plan stands in contravention of the law.

Revised Resolution Plan Approval:
The revised resolution plan submitted by the resolution applicant was not placed before the CoC for approval before being presented to the Adjudicating Authority. This procedural irregularity is material and cannot be ignored. The Appellate Tribunal's disapproval of the resolution plan on this ground is upheld.

Increase in Fees of Resolution Professional:
The Appellate Tribunal's observations linking the increase in fees of the resolution professional to the irregularity in the process are not justified. The CoC's decision on the fees was independent and cannot be correlated with the procedural irregularity. The findings of the Appellate Tribunal on this issue are set aside.

Treatment of Related Party:
The Appellate Tribunal erred in applying the principles of non-discrimination to related parties. There is no mandate in the Code that related parties should be paid in parity with unrelated parties. The resolution plan's treatment of related parties was in accordance with the law. The findings of the Appellate Tribunal on this issue are set aside.

Settlement Offer of Promoter:
The Appellate Tribunal erred in holding that the settlement offer of the promoter was not considered by the CoC. The CoC's decision to not discuss the settlement offer in its ninth meeting was justified. The findings of the Appellate Tribunal on this issue are set aside.

Impact of Subsequent Events:
The subsequent approval of the promoter's settlement proposal by the CoC with 100% voting share requires consideration by the Adjudicating Authority. All relevant aspects, including the justification for invoking Section 12-A after receiving resolution plans, are left open for the Adjudicating Authority's consideration.

Conclusion:
The impugned judgment and order dated 17.02.2022 are not interfered with regarding the disapproval of the resolution plan for reasons affirmed in points C2, C3, and D1. Other findings, observations, and directions of the Appellate Tribunal are set aside. The Adjudicating Authority is to consider the fresh settlement proposal of the promoter, keeping in view the applicable law and facts of the case.