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TMI Blog2021 (4) TMI 999X X X X Extracts X X X X X X X X Extracts X X X X ..... nship with the Corporate Debtor i.e. Respondent no. 1 since 2017 for production on job work basis as per the agreement between them. This arrangement was further extended between the Applicant and the Corporate Debtor by MoU dated 02.01.2020 whereby the Applicant assigned the job work to the Corporate Debtor for utilizing the plant and machinery and other infrastructure belonging to the Corporate Debtor for production of goods for applicant. Subsequently, Corporate Debtor was admitted into Corporate Insolvency Resolution Process by the order of this Authority dated 31.01.2020. The Respondent No. 1 was appointed as an IRP. Later on, the Committee of Creditors ("CoC") confirmed his appointment as Resolution Professional ("RP"). The Respondent No. 1 is in-charge and in control of all the assets of the Corporate Debtor, i.e. M/s. Krishna Knitwear Technology Limited. On 04.08.2020, the Applicant expressed his interest to run the spinning capacity of the plants of the Corporate Debtor situated at samarvani & Piperia pursuant to public invitation issued by the Resolution Professional of the Corporate Debtor. On 10.08.2020, the Resolution Professional required the Applicant to submit final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de within 7 days from the date of decision of CoC. 4. The Applicant made the some payments and also requested the Resolution Professional to execute lease agreement and provide full access of the location so that the Applicant could carry out the operations. Further payments were made on 12.09.2020. The Resolution Professional wrote an email on 29.09.2020 whereby he acknowledged the receipt of payment and sent signed of the lease agreement return thereof within 3 days after acceptance by applicant and to take possession of the production facilities at Silvassa and Piperia. On 29.09.2020, the Resolution Professional also wrote a letter that pending receipt of other sums in terms of approval of the CoC in its meeting dated 19.08.2020, the Applicant could take back 80% of the stock belonging to the Applicant which was lying at the plant of the Corporate Debtor at Silvassa and 20% of said stock would be released after receipt of payment of pending dues. On 03.10.2020, there was further correspondence regarding mechanism to be adopted during the course of lease period. On 08.10.2020, the Applicant also wrote letter to the DGM of the Andhra Bank wherein it was stated that although Resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in reality the possession was not given in the real sense so that applicant could have started manufacturing operations thereafter. Thus, the application should be viewed on the premise that possession has not been given at all. He further submitted that in terms of MoU dated 02.01.2020, there was no liability for the so called dues, but having regard to the goods of the applicant lying in the plant and in the hope of getting a new contract and to recoup such costs and earn forfeit were paid. It was also claimed that during the course of subsistence of MoU dated 02.01.2020 issued advertisement for giving the plant on lease basis was published. The Learned Senior Counsel further pleaded that action of Resolution Professional was not in accordance with the scheme of Code. 7. The learned counsel for the Resolution Professional submitted that the conduct of Resolution Professional was fair and transparent. Members of CoC were also informed in this regard status of operations of Corporate Debtor was also apprised from time to time. The dues which were asked by the Resolution Professional to be paid by applicant before execution of lease deed pertained to the period of MoU dated 02.01. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors. However, that is separate issue and as such, it has got no bearing on the issue raised before us except that it has been alleged by the applicant that for this reason, free movement was not allowed by Respondent No. 2. In the present case, it is not in dispute that Applicant is having business relationship of the similar nature with the Corporate Debtor since 2017 i.e. production of goods on job work basis. Before initiation of Corporate Insolvency Resolution Process, MoU had also been entered into between the Applicant and Corporate Debtor i.e. M/s. Krishna Knitwear Technology Limited on 02.01.2020. It is also not in dispute that during Corporate Insolvency Resolution Process, Applicant and Corporate Debtor through Resolution Professional being Respondent no. 1 entered into lease agreement on 29.09.2020 for an initial period of 3 months subject to payment of certain sums. The Applicant has made such payment as insisted by RP for execution of lease agreement. The applicant claims that, in spite of execution of the lease agreement and clearing of agreed dues, the Respondent No. 1 (RP) did not hand over effective possession of the plants to carry out business operations as pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its were being run for job work of the applicant. These facts show that Resolution Professional did not apprise even CoC in the manner in which he should have. In fact, in the first meeting of CoC, no discussion has taken place on the operational status of the Corporate Debtor which is one of the crucial aspects of Insolvency Resolution Process because RP is not only mandated to conduct the CIRP but one of its primary duties is to manage the affairs of the corporate debtor as a going concern because if the corporate debtor remains a going concern, the aspect of maximization of value of assets, being one of the prime objects of Insolvency and Bankruptcy Code, 2016 would be achieved. 12. Moving forward to the third meeting of CoC which was held on 07.07.2020, it is noted that due to Covid-19 pandemic situation and lockdown being in place Resolution Professional was dependent on the information supplied by the plant head Mr. Sharma who was also under quarantine. Apart from this, no discussion on the proposal of running the plant of lease basis although public advertisement, in this regard, published in this month only on 31.07.2020 before fourth meeting of CoC which was held on 19.08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld on 27.10.2020, in item no. 10 it was informed that the M/s. Kausar Textiles Private Limited had made certain payments which included part payment of electricity bill. The amount paid on this account stood at Rs. 44,79,472.63/-. It was also informed that there was a further outstanding amount of electricity charges for Samarvani Plant to the tune of Rs. 37,28,239/- on September, 2020 which was also to be paid by the Applicant. As regard to the labour dues, it was pointed out that the applicant had paid Rs. 17,50,000/- towards payment of such dues. In this meeting, the issue of some of assets belonging to the other Corporate Debtor i.e. K. Lifestyle & Industrial Limited also cropped up. It was pointed out that ownership Plot No. 65/4 at Samarvani was claimed to be belonging to M/s. K Lifestyle & Industries Limited. However, it was noted that the title deeds of such property owned by M/s. K Lifestyle & Industries Limited were not produced. The Resolution Professional also sought cooperation of CoC members in this regard. The purpose of discussion of this aspect is because the applicant herein has claimed that effective possession was never allowed to him owing to this dispute raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In this letter a request for refund of money was also made along with a request to give authority to remove the goods. 15. Thereafter, sixth meeting of CoC was held on 21.12.2020. In the said meeting, the lease agreement with the applicant has been terminated for the reason that the applicant did not allow inspection to Resolution Professional on 07.11.2020. However, the fact remains that the plant manager of the Corporate Debtor which is Mr. Sharma and its two supervisors were always there. No material has been brought on record to show that such persons had been removed or ceased to be the plant head or supervisors and, in this situation, such allegation of the Resolution Professional does not appear to be logical. Thus, this is just a pretence or excuse which the Resolution Professional was looking for to terminate the lease agreement after receiving an amount of Rs. 73.57 lacs approximately from the applicant, particularly when the letter of applicant dated 08.10.2020 has remained uncontroverted, this view cannot be said to be assumptive. No material has been brought on record to show that corrective measures were taken by Resolution Professional to protect the assets of cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to enter into such agreement which was declined by us as present application was pending for disposal. It is also noted that in the said meeting resolution was also proposed to sale the stock of raw material/finished goods/working progress belonging to the applicant to realize so called outstanding dues. During the course of hearings on different dates, we asked the Resolution Professional and his advocate to show us the clause as to how and on what basis such goods could be retained by Resolution Professional or sold. It is also noted that dues of period prior to execution of lease agreement dated 29.09.2020 have been cleared at the time of execution of such lease agreement or immediately thereafter although applicant was not liable to pay major part of such dues for no operations being carried out during lockdown and as per terms or MoU dated 02.01.2020. On the contrary, for premature termination of this MoU before lock-in-period of two years, corporate debtor is liable to pay a compensation of Rs. 20,00,000/- to the applicant. We asked them to refer the relevant provisions of the lease agreement dated 30.09.2020. Our attention was drawn to clause 4, 5 & 6 of MoU dated 02.01. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtions of memorandum of understanding dated 02.01.2020 executed between the applicant and the corporate debtor. Main features of MoU dated 02.01.2020 are as under: M/s. Krishna Knitwear Technology Limited (hereinafter referred as a "KKTL"). The other portions of this MoU is not relevant, hence, not reproduce and M/s. Kausar Textile Private Limited (hereinafter referred as "KTPL") not relevant, hence, not reproduce. And whereas KKTL has been carrying on business of Spinning and Knitting for around 2 decade sat its units located at Krishna Nagar, Samarvani, Silvassa. And whereas KKTL at the request of KTPL, agreed to perform job work on one of its units, so as to have effective utilization of the plants and machineries, which have been under-utilized due to financial crunch. And whereas, both the parties, keeping in view the mutual interest, agreed to execute the MoU, covering all the covenants, more specifically described hereunder written. And whereas KKTL agree to perform the job work of KTPL by utilizing the P&M and other Infrastructure, available at Krishna Nagar-Samarvani Silvassa and Piperia-Silvassa. And whereas in view of the understanding arrived KKTL, agrees to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... monthly production of Ring frame yarns and Rs. 1 per kg on OE yarns subject to a minimum sum of Rs. 1,00,000/- (Rupees One lakh only) per month, on or before the 7th of very next month i.e. for the month of January, 2020, KTPL shall pay the amount on or before 7th February, 2020. Both the parties agree that the minimum sum of Rs. 1,00,000/- per month would be paid by KTPL to KKTL, irrespective of the fact that there is any job work to be performed or not, except on account of inability of KKTL to do so or due to force-majeure. 5. It is expressly agreed between the parties that the said sum of Rs. 2.0/kg for RF yarns and Rs. 1 per kg for OE yarns or minimum of Rs. 1,00,000/- would be over & above all the expenses borne by KTPL, in respect of the said mill, inter alia, expenses towards power/electricity, salary, wages in respect of employees etc. It is also agreed that KTPL, after making payments towards all such expenses, would provide evidence thereof to KKTL at regular interval. 6. It is expressly agreed that in case KTPL, falls to pay the expenses as mentioned in point no. 5 and/or fails to pay monthly compensation on the production of yarn at agreed rate or Rs. 1,00,000/- K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, Village Samarvani, Union Territory of Dadra and Nagar Haveli-396 230 and Plot Nos. 59, 70/1, 70/4, & 70/5 of Dan Udyog Sahakari Sangh Limited, Silvassa, Village - Amli (Piperia), Union Territory of Dadra & Nagra Haveli-396 230. For manufacturing, spinning, knitting and processing textile products. And whereas due to certain financial and other resource constraints it desired to maximize the value of the corporate debtor said facilities be given on lease. And whereas party to the second part (Kausar Textile Private Limited or Lessee) has shown its interest in the proposal to undertake business activities at the aforesaid facilities and its proposal has been duly approved by the committee of creditors constituted in the Corporate Insolvency Resolution Process of the Corporate Debtor. Now this lease agreement is hereunto being entered into on the terms and conditions as laid down below: 1. Lease: Not relevant, hence, not reproduced. 2. Period of Lease: Not relevant, hence, not reproduced. 3. Consideration: The Lessee shall pay to the Lessor, Lease rent at the rate of INR. 7,00,000 (Seven lacs) per month and applicable taxes for the entire period of the Lease. Such rent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possession, operation, and use of the Facilities and assumes all risks and liabilities arising from or pertaining to the possession, operation or use of the Facilities. Lessee does hereby agree to indemnify and keep indemnified and hold safe and harmless the Lessor from and covenants and undertakes to defend Lessor against any and all claims, costs, expenses, damages and liabilities whether civil or criminal, of any nature whatsoever, arising from or pertaining to the use, possession, operation or transportation of the Equipment. Any fees, taxes or other lawful charges paid by Lessor upon failure of Lessee to make such payments, shall become immediately due from Lessee to make such payments, shall become immediately due from Lessee to Lessor. Lessee further covenants and undertakes to indemnify and keep indemnified the Lessor against loss of any asset to the facilities by seizure by any person other than the Lessor for any reason whatsoever, or resulting from any form of legal process initiated by any person other than the Lessor, provided that such indemnity shall not cover such loss as arises out of any neglect or default on the part of the Lessor. Lessee further agrees to indemn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other amounts owing hereunder shall be absolute and unconditional. This Lease Arrangement cannot be amended except in writing and shall be binding upon and to the benefit of the parties hereto their permitted successors and assigns. Clause 15 is not relevant, hence, not reproduced 16. Arbitration: All disputes, differences, claims and questions, whatsoever, which shall arise either during the subsistence of this Lease Arrangement or afterwards between the parties and/or their respective representatives touching these presents or any clause or thing herein, contained or otherwise in any way relating to or arising from these presents shall be referred to the arbitration of two Arbitrators, one to be appointed by each party to the dispute and such arbitration shall be in accordance with and subject to the provisions of the Arbitration and Conciliation Act, 1996 or any statutory modification or reenactment thereof for the time being in force. Clause 17 is not relevant, hence, not reproduced. 19. Some of the provisions of MoU dated 02.01.2020 has already been discussed, hence, not repeated. From other provisions, as reproduced hereinbefore it is apparent that such MoU is having p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rational arrangement to CoC and during the subsistence of MoU dated 02.01.2020. Even the term of lease has been reduced from 6 months to 3 months and no reason has been given for that. This action is not justified as this results into distraction from the main purpose i.e. time bound Insolvency Resolution as after expiry of time of lease, fresh process is to be done. Further, this also adds to CIRP costs. 20. It pains us to point out that in fact, Resolution Professional has forced the applicant to pay the amount pertaining to period of lockdown during which plant was closed and legally also there was no liability of the applicant to pay such dues and such action of the Resolution Professional has been accepted by the applicant. We wondered why this treatment has been accepted. We could find only two reasons for this. 1. That goods worth Crores of rupees belonging to the applicant were lying there. 2. The Resolution Professional made payment of such dues as a pre-condition and the applicant in the hope of recouping the same from further operations accepted. Thus, considering these facts, we have no hesitation in holding that it is an instance of use of coercions or undue influence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re also applicable to Resolution Professional as Section 5(27) provides that Resolution Professional shall include IRP and as per Section 23(2) of the Code, Resolution Professional is duty bound to exercise powers and performance duties as vested or conferred on IRP. In addition to this, Section 25 also enumerate duties of Resolution Professional, and by not continuing the business operations of the Corporate Debtor as a going concern or in view of the fact that theft of property has also taken place in the plants in spite of two supervisors of Corporate Debtor and one plant being there and who are directing under control of Resolution Professional, Resolution Professional has also failed to preserve and protect the assets of the Corporate Debtor. Thus, provisions of Section 25(1) have also been violated. 24. Since, in the case of same Corporate Debtor one common order has been pronounced by this Bench in IA 953 of 2020 and IA 13 of 2021 on 05.04.2021, whereby we have replaced the Resolution Professional, hence, we do not wish to make any further observations on the conduct and approach of Resolution Professional. We are also not making any further observations on the approach of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all as noted in the earlier part of this order. The purpose of this discussion is to enter into the area whether termination of the MoU dated 02.01.2020 and non-performance of lease agreement dated 29.09.2020, can be said to be in relation to or arisen out of Insolvency Resolution of the Corporate Debtor as per the provisions of Section 60(5) (c). If the question is answered in negative then in that event whether after admission of Corporate Debtor into Corporate Insolvency Resolution Process (CIRP), could reliefs claimed by the Applicant fall under clause 60(5) (b) of the Code and therefore such reliefs could be granted to the applicant. As regards to the applicability of Section 60(5) (c), It is normal practice that several parties come before this Adjudicating Authority for example non-admission of claim lodged by the Creditors or rights of third parties as regards to property belonging to them being not released by the RP, which was in possession of the Corporate Debtor at the time of commencement of Corporate Insolvency Resolution Process (CIRP) etc. etc. In those cases, this Authority takes cognizance and dispose of these matters in accordance with the provisions of Code ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this right is defined in very wide manner and covers various kinds of rights which may arise out of contract or judgment or even disputed. Thus, if claims of applicant are disputed by the RP still it would fall under the definition of claims. Assuming for a moment that it is claimed that payment of old dues was made by applicant and, there is no provision for refund of that, either in MoU dated 02.01.2020 or lease agreement dated 30.09.2020, hence, not admissible. Our answer to this possibility is that first of all these dues were no payable by Applicant under both these agreements and, secondly, lease agreement has not been performed, hence, having regard to the term "equitable" used in clause (a), the applicant is entitled to get refund of the same on equitable considerations which squarely apply to the facts of the case. Further, provisions of clause (b) can be applied for payment of compensation for breach of MoU on account of premature termination of such MoU (refer clause 12 of MoU). In addition to this, this clause can also be applied to get suitable remedy for breach of lease agreement even if it is disputed by Corporate Debtor. 26. Having stated so, we also consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he corporate debtor. Regulation 38(1) also states that the amount due to operational creditors under a resolution plan shall be given priority in payment over financial creditors. If nothing is to be paid to operational creditors, the minimum, being liquidation value - which in most cases would amount to nil after secured creditors have been paid - would certainly not balance the interest of all stakeholders or maximise the value of assets of a corporate debtor if it becomes impossible to continue running its business as a going concern. Thus, it is clear that when the Committee of Creditors exercises its commercial wisdom to arrive at a business decision to revive the corporate debtor, it must necessarily take into account these key features of the Code before it arrives at a commercial decision to pay off the dues of financial and operational creditors. There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or sub- class of creditors is with the Committee of Creditors, but, the decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicant agrees to get its job done either after taking the plant on lease or in the like arrangement which was prevalent under MoU dated 02.01.2020. In case, it is not done, we also have authority to direct the RP to return the money (Rs. 7357 Lacs), which has been paid by the Applicant to the RP @ 12% p.a. Also to direct RP to return goods belonging to the Applicant which is lying at the plan of the Corporate Debtor even otherwise there is no bar or limitation on our jurisdiction as regard to direction to the RP to return the goods as this is not a property belonging to the Corporate Debtor nor there is any liability of the Applicant for which it could be retain the same as security particularly. In this regard, the Hon'ble Supreme Court of India, though, in the context of termination of PPA by a Government Agency on account of the insolvency of the Corporate Debtor, held that the Adjudicating Authority can decide the contractual issues between the Corporate Debtor and third party, if such issues were in relation to or arose out of insolvency resolution. The issues raised in this application would not have been arisen if the Corporate debtor was not admitted into CIRP because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear that the issues raised in this application can be said both as in relation to or arising out of insolvency resolution and a claim against the Corporate Debtor. Therefore, even if some financial obligation becomes payable by the Corporate Debtor, in our view, the same needs to be met by the Corporate Debtor. Further, CoC is involved and such actions have taken place under their knowledge after certain stage i.e. after publication of advertisement dated 31.07.2017 and resolution for termination of MoU as well as for execution of lease agreement has been approved by CoC and thereafter, these problems have happened, hence, in case the Corporate Debtor does not have resources to meet such obligations, in our view, the members of CoC are liable to pay the same. Thus, considering various aspect of the matter and applicable legal provisions, we hold as under: (1) The entire goods belonging to the Corporate Debtor is to be released immediately on receipt of this order. The CoC is advised to ensure the same. (2) The new RP should look into the possibility of running the plant of the Corporate Debtor on lease basis or under any other arrangement with the Applicant who will have first ..... X X X X Extracts X X X X X X X X Extracts X X X X
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