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TMI Blog2019 (8) TMI 1654X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial & General Workers Union of Trend Electronics Ltd. Mr. Ankit Lohia a/w Disha Kunder i/b Lodha Legal, for ATC Telecom Infrastructure Private Limited ORDER M. K. Shrawat, J. ORDER 1. There are as many as 15 applications, some are in favour of the 'Consolidation' and some are opposing the 'Consolidation' of insolvency process of the Videocon group Companies, therefore, a summary at the outset shall be useful to deal all of them in this combined order. It is also worth to mention at the beginning itself that the facts and circumstances as narrated in these applications are conjoint and linked with each other, therefore, a common order is passed herein below. A bird eyed view of the applications under consideration is as under: a. MA 1306/2018 in CP No.02/2018, CP No. 01/2018, CP No. 543/2018, CP No. 507/2018, CP No. 509/2018, CP No. 511/2018, CP No. 508/2018, CP No. 512/2018, CP No. 510/2018, CP No. 528/2018, CP No. 563/2018, CP No. 560/2018, CP No. 562/2018, CP No. 559/2018, CP No. 564/2018 (a common application applicable to all main petitions of various Corporate Debtors). This application is filed by SBI seeking consolidation of Corporate Insolvency Resolution Process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ennium Appliances Admitted III 31.08.2018 Avil Menezes 13. SKY Appliances Admitted III 31.08.2018 Mahender Khandelwal 14. PE Electronics Admitted III 31.08.2018 Divyesh Desai 15. Techno Electronics Admitted III 31.08.2018 Divyesh Desai 3. Mr. Venugopal N. Dhoot, ex-director/promoter had filed an application (CA/1022(PB)/2018) before the Principal Bench, NCLT New Delhi praying that all the matters relating to the Corporate Debtors must be heard by one and the same court of Mumbai Bench of NCLT. Likewise, another application was filed by the State Bank of India before the Principal Bench seeking the same reliefs as were sought in the said Application i.e. consolidation of CIRPs of all the Corporate Debtors. The Hon'ble Principal Bench disposed of both the applications vide a common order dated 24.10.2018. In the said Order dated 24.10.2018, the Hon'ble Principal Bench has transferred all matters where CIRP commenced of the Corporate Debtors to this Bench as it will, inter alia, serve the basic purpose of tagging of all matters to avoid conflicting orders, if any, in the connected matters . In the same order, while dealing with the reliefs prayed for by St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o pending consideration before another Bench. The prayer made in the application is that all these matters shown in the table, para underneath the table and CP No. (IB)- 01(MB)/2018 be listed before one Bench. 3. In the second application, the prayer made is for consolidation of all these petitions and issue further directions to treat the Corporate Insolvency Resolution Process as one in respect of all the Videocon group of companies. 4. Notice of the applications to the non-applicant. Notice accepted by the learned counsel for non-applicants. 5. We have heard the learned counsel for the parties, there appears to be consensus amongst the counsels for all the parties that all the petition be placed before one bench. Accordingly, we find that the lead case and majority of the matters are posted before Bench headed by the Hon'ble M.K. Sehrawat, Member (Judicial). Therefore, it will serve the basic purpose of avoiding conflicting order and facilitating the hearing if the matters are posted before the aforesaid bench. Accordingly, we direct that the matter be posted before the aforesaid bench. The Registry of NCLT, Mumbai is directed to take steps and place the matters before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s solely for the purposes of CIRP in accordance with the provisions of the Code, including but not limited to the acceptance, confirmation and all other actions with respect to the resolution plan for the Corporate Debtors and any and all amendments or modifications thereto, in such consolidated proceedings. (b) Order and direct that solely for the purpose of the consolidated proceedings, all assets and liabilities of the Corporate Debtors are merged and are deemed to be the assets and liabilities of all the Corporate Debtors on a consolidates basis; (c) Order and direct that solely for the purpose of the consolidated proceedings that all obligations and debts due or owing to or from any Corporate Debtor from or to any other Corporate Debtor are eliminated; (d) Order and direct that solely for the purpose of the consolidated proceedings, any obligations of any Corporate Debtor an all guarantees thereof executed by one or more of the other Corporate Debtors are deemed to be one obligations of all the Corporate Debtors on a consolidated basis; (e) That each and every claim filed in the individual proceedings of any of the Corporate Debtors is deemed filed against all the Corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mer electronic goods and home appliances at Telangana. k. Century Appliances is manufacturing and trading consumer electronic goods and home appliances at Maharashtra. l. Evans Fraser is an investment Vehicle/Real Estate Arm for the Videocon Group of Companies. m. PE Electronics brings together two premium brands Philips and Electrolux, under exclusive brand licensee agreements, which complement each other as a single entity and PE Electronics Markets and Trade in the products of the aforesaid brands. n. Electroworld holds the interest in the Telecom arm of VIL. o. CE India owns that Videocon Brand, Goodwill, trademark and patents. 8. It is submitted by the Ld. counsel for Applicant in MA No. 1306 of 2018 that the business activities of each of the Corporate Debtors are inextricably interlinked and intertwined. There is tremendous interdependent amongst each of the Corporate Debtor. It is pleaded that pursuant to Rupee Term Loan Agreement dated August 8, 2012 (RTL Agreement) a consortium of banks and financial institutions led by the Applicant had agreed to grant a rupee terms loan to VIL, KAIL, Electroworld, Value Industries, Evans Fraser, Millennium Appliances, PE Elec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he RTL Agreement. The RTL obligors agreed that each of the RTL obligors shall be deemed to be a "Co-obligor" under the VTL Agreement. 15. It is further noticed that on account of 'inter-linkage' and 'interdependence' in business and operations of the Corporate Debtors, they used to prepare 'consolidated financial statements' so as to give the overall financial position of the RTL obligors as a whole for the benefit of the various stake holders. 16. The lenders and other stake-holders of RTL obligors dealt with the RTL obligors a 'single-economic-unit' as per the 'consolidated financial statements'. SUBMISSIONS OF SBI FOR SUBSTANTIVE CONSOLIDATION OF CIRP OF THE CORPORATE DEBTORS 17. The Ld. Counsel for SBI Mr. Ravi Kadam submits that since the Corporate Debtors have been running their business and operations as if they were a single entity and a single economic unit and all the lendings have been done on such basis, therefore, the entire line of credit by Banks and financial institutions to the Corporate Debtors was extended relying upon their unity in business and operations. So the loans were extended with the understanding that the Corporate Debtors will be ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncipal amount of debt that has been granted is approximately Rs. 20,000/- Crores under the RTL Agreement and the VTL Agreement. It is the apprehension of SBI that on account of interdependence in business and operations of some of the Corporate Debtors on each other, few of the Corporate Debtors may not be able to get any resolution plans, much less, Resolution Plans dealing with the entire claims of all the creditors of such Corporate Debtors. For instance, the Corporate Debtors which have manufacturing facilities and assets may get Resolution Plans, but the Corporate Debtor which have either trading or investment as business may not. Further, the Corporate Debtor having trading or investment business do not have substantial assets in comparison to manufacturing units having land, building & machinery as tangible assets. Therefore, they may not get stand alone Resolution Plans unless they are clubbed together and offered as a group with other Corporate Debtor having manufacturing operations or holding substantial assets. This may result into automatic liquidation for such Corporate Debtor for which no Resolution Plan is submitted. 22. The object of the Code is resolution and reha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Insolvency commencement date for calculating the maximum period available for completing the CIRP. The Counsel suggests the 25th September 2018 as the date of CIRP commencement; 26. The Ld. Counsel for the SBI finally argues that lack of substantive consolidation may result in lesser value being derived for the Corporate Debtors which are expected to receive Resolution Plans, thereby traversing the object of the Code i.e. maximisation of the value of the assets of the Corporate Debtor. The potential benefit of the substantive consolidation during CIRP may far outweigh any potential harm to interested parties. 26.1 The gist of the arguments tendered by Sr. Adv. Mr. Kadam was that a majority of the common lenders of 15 Videocon Group companies had agreed that the consolidation of the CIRPs of these companies was necessary, as it would be in the best interests of the 15 Videocon Group companies, as well as all the stakeholders for the following reasons: (a) The 15 Videocon Group companies are interdependent on each other in terms of their business activities. It was appraised that the businesses included manufacturing of various consumer electronics goods spread across compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Debtor in this application are no different than as stated in MA 1306/2018 (supra). Hence both these applications can be disposed of cumulatively. ARGUMENTS AGAINST THE CONSOLIDATION D) MA No. 393/2019 29. This application is filed on 24.01.2019 by Infotel Business Solution Private Ltd (hereinafter referred to as "Infotel") Limited against (i) Mr. Mahender Khandelwal, the Resolution Professional (RP) of KAIL Limited and (ii) the State Bank of India, in the matter of M/s Cool Tech Appliances Private Limited Vs M/s Kail Limited (CP 543/2018). To make it clear, there was a Petition by M/s Cool Tech Appliances Pvt. Ltd. (Operational Creditor) Vs KAIL Limited, (Corporate Debtor) filed U/s 9 of I & B Code , stood Admitted vide order dated 08.06.2018 and Mr. Mahender Khandelwal was appointed as Insolvency Resolution Professional (IRP). He was confirmed as KAIL's RP at the first COC meeting held on 13.07.2018. 30. As far as the status of this Applicant is concerned, Infotel is the 'financial creditor' of KAIL Limited whose claim stated to be for a huge amount of Rs. 450/- Crores, undisputedly accepted by the RP. It is also worth to place on record that SBI is also the 'fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infotel to verify the same. It is stated that Infotel has not been given an opportunity to review corporate resolutions/decisions of KAIL to ascertain whether KAIL has adhered to legal requirements under the Companies Act before resuming such a large financial liability under the Co-obligor structure. 35. The Ld. Counsel for Infotel states that the RP must be held duty bound to share the RTL Agreement with Infotel specially since the Infotel's substantive legal rights are being prejudicially affected by an interpretation of the RTL Agreement. The Ld. Counsel for the Infotel states that this interpretation of RTL Agreement of obligor/co-obligor structure of the Corporate Debtors is misconceived and Infotel is thus challenging the consolidation because there is no provision under IBC which enables the same, especially when such a consolidation is going to adversely affect the Infotel's rights as a financial creditor of KAIL. 36. The Ld. Counsel for Infotel further submits that the claims filed by the Creditors under the purported co-obligor claims must not be allowed to be accepted by the RP (simultaneously with the RP of the borrower company to whom such amounts were lent), as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors independently by itself was a wrong approach of SBI as a Financial Creditor due to the reason that the insolvency code do not prescribe such approach i.e. when the assets are common against whom a common loan was granted which was put in black and white by RTL Agreement , the proposal of consolidation is not justifiable. REPLY OF SBI TO MA 393/2019 38. The Ld. Counsel for the SBI submits that the question regarding the legal validity and enforceability of the obligor/co-obligor structure that has been entered into between the Financial Creditor including the SBI and the Corporate Debtors is no longer res-integra since the validity of the (i) RTL Agreement, (ii) Rupee Facility Agreement and the (iii) Confirmation Agreement have already been upheld by all the three benches of this Mumbai Tribunal at the time of admission of section 7 applications filed by respective financial creditors. 39. In the matter of SBI Vs. Applicomp Private Limited (CP (IB) No. 507/2018), SBI vs Trend Electronics Limited (CP (IB) No. 559/2018), SBI Vs Century Appliances Limited (CP (IB) No. 562/2018) and SBI Vs Techno Kart India Limited (CP (IB) No. 510/2018), it was held that the obligation of the ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me value of money. As opposed to this, an operational creditor means a person to whom an operational debt is owed and an operational debt under Section 5 (21) means a claim in respect of provision of goods or services. 28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor - it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter that the debt is disputed so long as the debt is "due" i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise. 31. The rest of the insolvency resolution process is also very important. The entire process is to be completed within a period of 180 days from the date of admission of the application under Section 12 and can only be extended beyond 180 days for a further period of not exceeding 90 days if the committee of creditors by a voting of 75% of voting shares so decides. It can be seen that time is of essence in seeing whether the corporate body can be put back on its feet, so as to stave off liquidation. 32. As soon as the application is admitted, a moratorium in terms of Section 14 of the Code is to be declared by the adjudicating authority and a public announcement is made stating, inter alia, the last date for submission of claims and the details of the interim resolution professional who shall be vested with the management of the corporate debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 90 days or else the chopper comes down and the liquidation process begins." (Emphasis Supplied) 41. Hence, the Ld. Counsel for SBI submits, in the light of the above verdict, since NCLT Mumbai Benches have already considered the legal validity and enforceability of the RTL Agreement and the "obligor/co-obligor structure", Infotel has no locus to challenge the same. The amounts lent by SBI to KAIL under the RTL Agreement and the Confirmation Agreement fall under the category of "financial debt" under section 5(8) of the I&B Code. Therefore, the physical disbursement of amount to KAIL is not necessary to come within the meaning of "financial debt". In other words, to constitute a financial debt, actual disbursement of money is not a condition precedent. Under both the conditions, whether a loan has actually been disbursed or whether taken up a liability as obligor/Co-obligor, either way, to be treated as a financial debt. As held in Dr. B.V.S. Lakshmi v. Geometrix Laser Solutions Pvt. Ltd. [Company Appeal (AT) (Insolvency) No. 38 of 2017], order dated 22.12.2017, that : "....To show that there is a debt due which was disbursed against the 'consideration for the time value of money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44. It is further submitted that pursuant to the RTL Agreement, a consortium of banks and financial institutions including SBI had agreed to grant 'Rupee Terms Loans' to the Videocon Group as obligors as well as under an obligor/co-obligor structure. The Rupee Term Loans under the RTL Agreement were to be utilised for the purposes of refinancing of existing rupee debt of the RTL obligors, funding the capital expenditure in relation to the Ravva Field and the capital expenditure in relation to the consumer electronics and home appliances business of the RTL obligors and such other end users as permitted by the facility agent under the RTL Agreement. Recital C of the RTL Agreement states that: " The Rupee Term loan has been sanctioned by the lenders for the purposes of refinancing of existing Rupee debt of the obligors, funding the capital expenditure in relation to the consumer electronics and home appliances business of the obligors and such other end uses permitted by the Facility Agent". (Emphasis Supplied). 45. Further, Mr. Madhav V. Kanoria further argued that as per clause 2.3 of the RTL Agreement by dealing with the obligations of the obligor, it is stated that "VIL and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07.2012 to 30.06.2013. The relevant extract from the said financial statements is as follows: "The company along with 12 other affiliates/entities (collectively referred to as "Obligors" and individually referred to as "Borrower") executed facility agreement with consortium of existing domestic rupee term lenders, in the obligor/co-obligor structure, wherein all the Rupee Term Loans of the obligors are pooled together...." These accounts have been approved by the Board of Directors and shareholders of KAIL and have already been filed with the ROC. 47. In 2016, pursuant to the Confirmation Agreement, RTL obligors including KAIL assumed all obligations of VTL towards its lenders in respect of the Rupee Facility Agreement whereas VTL assumed all obligations of the RTL obligors towards their lenders in respect of the RTL Agreement. Clause 2.1 of the Confirmation Agreement dated 20.06.2016 provides as follows: "Confirmation of obligors and VTL The obligor hereby covenant and agree with the lenders that with effect on and from the date hereof, they shall perform all duties and obligations of the borrower under the Rupee Facility Agreement as if each of the obligors had been an or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers under the VTL facility agreements (including receivables from VTL) on a reciprocal first pari passu basis. Thus VTL is also inducted as a co-obligor in the said facility agreement with the Consortium of RTL lenders. As per the said facility agreement each of the company in the group is co-obligor and each company is contingently liable in respect of outstanding balance of Rupee Term Loans of VTL as on 31.03.2017 of Rs. 2,468.34 Crore (As at 31st December, 2015 Rs. 3,047.36 Crore)." (Emphasis Supplied) 50. Hence, the Ld. Counsel for SBI further submits that being a third party in respect of the RTL agreement and Confirmation Agreement, it is not open to Infotel to question the commercial wisdom of KAIL and other lenders about the validity of the RTL Agreement and Confirmation Agreement, as the same is already upheld in the admission order of this Tribunal in the aforesaid matters. Neither the I&B Code nor the rules and Regulations made therein draw a distinction between Primary and Secondary borrowings of Corporate Debtor as now pleaded by Infotel in its application. Infact, Infotel's own letter to the RP of KAIL dated 15.10.2018 reveals that the obligation of KAIL under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and time did not commence to run until the plaintiffs made demand upon him." (Emphasis Supplied) 52. It is further submitted that SBI has maintained a common account for the RTL Obligors viz, the account under the name "Videocon Industries Ltd. and 12 Group Companies" bearing number "32669037910", and thus it is substantiated that SBI acted in the presumption that each individual obligor would be liable for the repayment of the entire debt amount. 53. The Ld. Counsel for SBI has relied on the judgement passed by Hon'ble NCLAT in Company Appeal (AT)(Insolvency) 304/2017 in the matter of Export Import Bank of India Vs Resolution Professional of JEKPL Private Limited, Order dated 14.08.2013, wherein it was held that: "21. From the cross checking of the respective deeds of JEPL and JEKPL, we find that both are liable jointly and severally as 'Principal Debtor' for the EXIM Bank. Thus, the 'Corporate Counter Guarantee' in question in respect of due performance and discharge of obligations and liabilities of JEPL to EXIM Bank essentially comes within the ambit of its 'supplementary/additional guarantee..... 57. Admittedly, JEKPL has given the 'Counter-Indemnity Obligation by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor. 4. Before payment the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. As Lord Eldon observed in Wright v. Simpson "But the surety is a guarantee; and it is his business to see whether the principal pays, and not that of the creditor". In the absence of some special equity the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings. 5. Likewise where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal. In Lachhman Joharimal v. Bapu Khandu and Surety Tukaram Khandoji the Judge of the Court of Small Causes, Ahmednagar, solicited the opinion of the Bombay High Court on the subject of the liability of sureties. The credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et aside the admission of claims of financial creditors listed under the "co-obligor structure" without making the banks and financial institutions a party to the litigation. That will be adversely affected by the said reliefs prayed for as parties to the Application. Hence, the Application suffers from the vice of Non-joinder of necessary parties and deserves to be dismissed in limine. E) MA No. 115/2019 (held infructous on 01.07.2019) 57. This application is filed on 16.01.2019 by Infotel seeking its impleadment as a party in all the Miscellaneous Applications and Applications filed before this Tribunal seeking consolidation of KAIL Limited with any other Videocon group company. The impleadment is sought for the reasons stated in MA 393 of 2018. For the sake of repetition, the Applicant is concerned about its 40.21% share in the CoC meeting, which will be reduced to about 2% if the application for consolidation is allowed. Since the issue raised in this Application stood merged in the main Misc. Application No.393 of 2019, therefore this M.A. 115/2018 needs no independent adjudication, hence dismissed as redundant. F) MA No. 1583/2018 58. This application is filed on 11.12.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that since there are no provisions which allow for consolidation under the IBC or the regulations made thereunder, the NCLT does not have the power to pass such orders. He added that each of the companies filed separate financial statements, and hence consolidation in such a scenario will not be fruitful. G) MA No. 778/2019 63. This application is filed on 22.02.2019 by Shri Vinayak Engineering & Shri Vinayak Industries, who are the Operational Creditors of M/s Trend Electronics and have lodged their claims with the IRP on 09.10.2018 and 07.10.2018 respectively. This application is also filed for intervention in applications for consolidation of CIRPs of 15 Videocon group companies. 64. As stated above, Trend Electronics is a listed public limited Company. Trend Electronics being an independent entity and in the eyes of law, its operational Creditors, assets, operations are all independent and cannot be merged with the other companies. Hence, the Applicants are seeking that the Corporate Insolvency Resolution Process of Trend Electronics be not consolidated with Corporate Insolvency Resolution Process of other companies. H) MA No. 774/2019 65. This application is filed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operational creditor of one of the group companies where it accounts for more than 10% of total dues and therefore got the right to attend CoC meetings. In the event the debt of all the group companies is consolidated, the Applicant's right to attend the CoC meetings will be lost because of reduction of share below 10% in the consolidated debt. 72. The Applicant further relies on the judgement of Hon'ble NCLAT in the matter of Binani Industries Ltd & Ors. Vs. Bank of Baroda & Ors. , Order dated 14.11.2018, wherein similar treatment was held to be given to both the operational as well as financial creditors: "48. If the 'Operational Creditors' are ignored and provided with 'liquidation value' on the basis of misplaced notion and misreading of Section 30(2)(b) of the 'I&B Code', then in such case no creditor will supply the goods or render services on credit to any 'Corporate Debtor'. All those who will supply goods and provide services, will ask for advance payment for such supply of goods or to render services which will be against the basic principle of the 'I&B Code' and will also affect the Indian economy. Therefore, it is necessary to balance the 'Financial Creditors' and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s consolidation is allowed, the fundamental concept of 'separate legal entity' will be frustrated. 73.1 Arguments made by Mr. Ankit Lohia on behalf of ATC Telecom Mr. Ankit Lohia stated that the claim amount of ATC was more than 10% of the debt of Videocon Telecommunications Limited, and hence it is an operational creditor, who will be affected by the consolidation of the 15 Videocon group companies. He further stated that the proposed consolidation would affect operational creditors of individual companies and that the treatment of the 15 companies as a 'single economic entity' would lead to an 'effective merger', and that the substance of the transaction was to be considered. In light of this, he referred to the case of 63 Moons Technologies Ltd. v. Union of India & Ors. (Supreme Court) dealing with inter alia, the powers of the Central Government under Section 396 to provide for amalgamation in public interest. Further, he added that the powers under Companies Act pertaining to amalgamations and mergers cannot be incorporated into the regime of the IBC and that the NCLT has no powers to grant such an order, since there are no provisions pertaining to consolidation under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be avoided or deferred . No option is available to this Bench to declare that in the absence of any specific provisions in the I & B Code 2016 issue of 'Consolidation' is premature so be not dealt with. Nonetheless, I cannot hold that in the absence of Law, the question of Consolidation need not to be addressed. I am aware that this approach shall not be appreciated being against the natural justice. Equity demands to give a verdict on an issue raised by the litigants before a court of law, but definitely within the four corners of the Law without transgressing the jurisdiction as prevalent currently. It goes without saying that the decision hereinbelow is going to be based upon the merits of this case; supported by case-laws pronounced in the past and evidence on record. Undoubtedly the treatment of 'group companies' for the Insolvency purpose is a complex subject, as appropriately observed in the 'Report'. That lifting of corporate veil for Insolvency purpose may affect Corporate Debtor's entity significantly , but considering the high stakes of the stakeholders and the lengthy arguments raised by various parties demanding a verdict urgently on the issue of ' Consolidation' , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs in following words, with due permission, as interpreted by me: An appeal was filed by a secured creditor James Talcott INC (Talcott), involving Continental Vending Machine Corporation (Continental) and its subsidiary, Continental Apco (Apco). The secured creditor (Talcott) objected an approved Plan of reorganisation of two debtor companies, which was the plan called for consolidation of proceedings. In the said plan, it was proposed to treat the properties of the two debtors on the basis of merger or consolidation of the said two entities. It was also provided that no secured creditors' claim shall be elevated as a result of consolidation. The Court has thrown a question whether the consolidation was "fair and equitable" as proposed in the reorganization plan. It has also been questioned whether to disregard corporate lines so as to consolidate the entities and to pool the assets and liabilities for the purposes of dealing with unsecured claims as well. The grievance of the secured creditor was that to do so, its claim would get effected. The Appellate Court had agreed with the decision of the district Court that the amended plan was "fair and equitable" since priority was gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not in the end prejudice Talcott, which would obtain under the amended plan exactly what was bargained. To quote "we have made it very plain that because consolidation in bankruptcy is "a measure vitally affecting substantive rights," the inequities it involves must be heavily outweighed by practical considerations such as the accounting difficulties (and expense) which may occur where the interrelationships of the corporate group are highly complex, or perhaps untraceable.... Thus there is nothing to say for the proposition that in the exercise of the bankruptcy court's equity powers........ it cannot treat unsecured claims as consolidated and secured claims as not..." Finally, it was ruled that the reorganization plan was recognised being fair and equitable. Interestingly there was a dissent by the Hon'ble Circuit Judge. But on the facts, however on principle of consolidation while discussing the necessity for substantive consolidation, it is observed that intertwined dealings of the debtors had not given any indication that the impugned consolidation was used solely for the benefit of one type of creditors. As per my understanding, on reading this judgement, a legal propositio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on have done so based upon equitable principles" unquote. So a ruling was given that, quote "it is clear that bankruptcy courts have the power to consolidate proceedings as well as consolidating the assets and liabilities of the debtors before the court.......This power arises from the court's equity jurisdiction. It is well established that "courts of bankruptcy are essentially courts of equity, and their proceedings inherently proceedings in equity" unquote. An argument was that on the interaction of the corporate group, the result is economic benefit to creditors in a consolidation proceedings. Because of the identical creditors or corporate dealings, the transactions sometimes so thinly veiled that creditors tended to rely upon the group for payment, rather than a single corporation. What is best for the general secured and unsecured creditors is to be examined. An observation was made that there was liberal trend in allowing consolidation of proceedings, is a result of judicial recognition of inter-related corporate structure with subsidiary corporations functioning under one corporate umbrella for the purposes of business planning. While considering the issue of consolida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Services Corporation Entity into Auto Train Corporation's Estate, effective nunc pro tunc. Armed with the consolidation order, the Trustee brought a proceeding in Bankruptcy Court to recover the payment. It was contested and the trustee made an appeal. Keeping the other issues aside, this Bench of NCLT has preferred to extract and discusss some of the relevant portions, wherein a legal ratio was laid down, revolving around the issue of consolidation. An observation was made that every entity is likely to have a different debt-to-asset ratio, consolidation invariably redistributes wealth among the creditors of the various entities. According to the Circuit Court, the problem of consolidation sometimes compounded by the fact that liabilities of consolidated entities, inter-se are extinguished by consolidation. Therefore, it was propounded that, "Before ordering consolidation, a Court must conduct a searching inquiry to ensure that consolidation yields benefits offsetting the harm it inflicts on objecting parties". A general view has also been expressed that the policy must be equality of distribution among creditors of the debtor. Any creditor that receives a greater payment than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iv. The degree of difficulty in segregating and ascertaining individual assets and liability, v. The transfer of assets without formal observance of corporate formalities, vi. The commingling of assets and business functions, vii. The profitability of consolidation at a single physical location. Therefore, unity of ownership is one of the factors for passing an order for consolidation, the same is to be examined. Finally, a key factor for granting substantive consolidation of all the debtors is required to yield an equitable treatment of creditors without any undue prejudice. By consolidating separate proceedings, results into pooling of assets of a debtor to provide a common fund for the payment of all claims. It is required to balance all the conflicting interests with a motive to achieve rehabilitation of debtor. The Court has captioned all those debtors as "consolidated debtors". Granting consolidation, it was ordered as under: Quote "(a) All assets and liabilities of the debtors and debtors in possession are merged and are deemed to be the assets and liabilities of the Consolidated Debtors; (b) All obligations and debts due or owing to or from any debtor from or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said two companies have filed separate plans for reorganization and disclosure statements. Although Dunkin Donut initially was a creditor of only Donut Queen, however, filed proof of claim against both entities i.e. Donut Queen and BAPAJO, inter-alia moved a motion to consolidate a judicial determination that its claim against Donut Queen itself affords the right to recover against BAPAJO assets as well. Dunkin Donuts (creditor) alleged that the affairs of the said two separate legal entities of the debtor so entangled that consolidation is necessary to protect the rights of creditors. Factors warrant consolidation were argued and summarised as under: 1. A unity of ownership and interest exists between these debtors as Gloria Morrison is the sole stockholder and president of both companies. 2. Donut Queen and Bapajo were co-guarantors of a loan made by LIT to Westbury Donuts, a third corporation which shares are solely held by Gloria Morrison. 3. The debtors failed on occasion to observe the formalities of corporate separateness. For example, no corporate resolutions were recorded by Bapajo regarding its guarantor relationship with donut Queen . Opposing the motion for con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Donuts has not met this burden. It has failed to adduce substantial evidence of an interrelationship between the debtors. Moreover, under the facts of this case, this court finds that Dunkin' Donuts took no steps to ascertain the financial creditworthiness of Donut Queen and did not in its course of dealing treat Dnut Queen and Bapajo as one entity. It would be manifestly inequitable to grant to Dunkin' Donuts the right to assert its claim against Bapajo, when, on review of the record, Dunkin' Donuts had no reasonable expectation of recovering from it sums owed by Donut Queen. Accordingly, the motion for consolidation is denied" Unquote. 80. Henceforward Summum bonum , is that the UK / USA courts have dealt with the process of consolidation along with the jurisdiction of the Authority by pronouncing that equity and fairness ought to be a yardstick by lifting the corporate veil. Consolidation is to be utilized as a mechanism to maximise the value of financially stressed group of companies. Economic benefit ought to be the purpose and for that a preliminary searching enquiry is suggested which would yield benefit to stakeholders by off-setting any harm, if inflicted, if not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement, a consortium of banks and financial institutions including SBI had agreed to grant 'Rupee Terms Loans' to the RTL obligors under an obligor/co-obligor structure. The Rupee Term Loans under the RTL Agreement were to be utilised for the purposes of refinancing of existing rupee debt of the RTL obligors, funding the capital expenditure in relation to the 'Ravva Field' and the capital expenditure in relation to the consumer electronics and home appliances business of the RTL obligors and such other end users as permitted by the facility agent under the RTL Agreement. Recital C of the RTL Agreement states that: " The Rupee Term loan has been sanctioned by the lenders for the purposes of refinancing of existing Rupee debt of the obligors, funding the capital expenditure in relation to the consumer electronics and home appliances business of the obligors and such other end uses permitted by the Facility Agent". (Emphasis Supplied). vii) Pooling of resources : Facts and evidences have demonstrated that there was common pooling of human resources, liaising and funding. Undisputedly, the directors are common using their contacts and relationship to run all the subsidiaries for whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsortium of banks' which is common for all. Because the impugned Insolvency Petitions were filed by SBI for itself and also on behalf of the said Joint Lenders Forum, already listed above, the names of all the banks forming consortium thus substantiate the fact that the financial creditors are common for the 15 debtor entities. xiv) Common group of Corporate Debtors : As per the said two agreements the Debtors are combined together for the purpose of availing various loan facility. Therefore, this is a case where all the Debtors are independently as well as jointly liable for the repayment of loans facilities availed. 81. One of the argument favouring consolidation in this case is based upon the fact that on calling the 'expression of interest' there was no positive response. In such a scenario where no resolution applicants are interested, the companies will go into automatic liquidation. The argument was that the assets of each companies are validly charged to secure the loans, and the secured creditors will be protected even if the companies go into liquidation, however, the liquidation route may affect the rights of the other stakeholders. Thus, the consolidation route is g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erweigh the consolidation. b. The other category/ classification can be of such group cases where the accounts are interlinked and due to the existence of debt agreement, the liabilities have become common but assets are identifiable. Hence, on segregation the independent structure of each unit shall survive which shall also result into viable profitable restructuring proposals. Therefore, in this category of cases, although for the limited purpose of signing of certain documents through which loan facilities might have been commonly availed but that can be segregated so that the assets and liabilities are identifiable separately thus facilitating a good investor. 83. While discussing bankruptcy law in US, we have noticed that under certain circumstances, consolidation request can be denied. A view was expressed that determination for consolidation hinges on a balancing of the equities favouring consolidation against the equities favouring continued debtor separateness. If the consolidation is not equitable or more disadvantageous to stakeholders, the request for consolidation denied. Therefore, the burden is on the party objecting consolidation to demonstrate that prejudice be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept out of consolidation. It is seen that Infotel (a financial creditor of KAIL Ltd.) has also sought for keeping this company out of consolidation, due to the reason that its own share as a financial creditor would be reduced if the consolidation is allowed. I hereby clarify that this company is kept out of consolidation due to the reason that it can function independently and not because the share of financial creditor would be reduced. Hence, MA 393/2019 of Infotel is hereby rejected being a self-serving demand not in line with the provisions of the Code. But the CIRP proceedings of KAIL Ltd. shall run independently, by denying 'Consolidation'. b. Trend Electronics Ltd.: This company is in the business of manufacturing and selling the dish antenna and Set-Top box which are mandatory pursuant to the compulsory digitalization by Ministry of Information and Broadcasting. Set-Top Boxes being in great demand in the country, this company is able to do business despite being referred to CIRP and is independently capable of maintaining itself as a going concern. Its business is not dependent on the other 14 companies. If this company shares a common CIRP with other companies, there wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the respective petitions a name was approved of Mr. Avil Menezes having registration No. IBBI/IPA-001/IP-P00017/2016-2017/10041. Therefore he is appointed as IRP. His consent is already on record in those cases . Mr. Avil Menezes IRP , he is directed to act upon without wasting a single day and report the progress fortnightly. (iii) In respect of the appointment of IRP in the case of M/s Trend Electronics Ltd., while admitting the petitions of the group a name of IRP Mr. Divyesh Desai having registration No. IBBI/IPA-001/IP-P00169/2017-2018/10338 has appeared and approved in few cases. Therefore, he is appointed for this Petition as IRP and directed to act upon immediately and report the progress fortnightly. 87. The appointed IRP is hereby directed that in case of the 13 Corporate Debtors, listed above, consolidation is now approved, therefore, on the basis of the consolidated Balance Sheet of the group drawn as on 31.03.2017, directed to be updated as on 31.03.2018 and thereupon Information Memorandum is to be prepared at an early date, so that urgently Expression of Interest can be invited. 88. In cases of M/s KAIL Ltd and M/s Trend electronics Ltd., these two Corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue of consolidation, further in past few months several petitions, one after another, have been filed by the creditors either demanding the consolidation or in some cases objecting the consolidation. Long arguments took place which ended in the month of June 2019. During the pendency of those applications, as an interregnum arrangement, this Court has thought it appropriate not to initiate insolvency process and to exclude the period of litigation for the purpose of computation of 180 days. It is, therefore, directed that from the date of admission of respective Petitions upto the date of this order, the period for computation of 180 days be excluded. This decision is taken under exceptional circumstances of these group case. On account of direction of Consolidation Order, a fresh approach for completion of CIRP is required to be adopted by the IRPs, now appointed, namely Mr. Mahender Khandelwal, Mr. Avil Menzes and Mr. Divyesh Desai .Therefore, for the purpose of calculation of 180 days as prescribed U/s 12 of I&B Code the corporate insolvency resolution process should be completed within 180 days form the date of this order. Registry is directed to upload on the site immedi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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