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TMI Blog2019 (9) TMI 1556X X X X Extracts X X X X X X X X Extracts X X X X ..... in order for the prospective investors to provide solutions to keep the entity as a going concern, the information memorandum must be made available to potential financiers within a reasonable period of time and if the information is not comprehensive, the Resolution Professional must put out the Information Memorandum with a degree of completeness and the information that she is willing to certify. In the report, an example is also given that the part of the Information Memorandum; the Resolution Professional must clearly state the expected shortfall in the coverage of liabilities and assets of the entity presented in the Information Memorandum. The Resolution Professional also must make sure that the information is readily available to whosoever is interested in bidding, a solution for Insolvency Resolution Process - thus, Resolution Professional becomes the manager of the negotiation between the debtors and creditors in accessing the viability of the entity. The facts, information and material make it clear that Deccan Resolution Plan was based on misleading MM Report 2016 uploaded in VDR, and this has rendered the entire Resolution Plan un-viable, un-feasible and that ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-compliance. Every time the Bid Bond Guarantee is invoked, it is co-incident with the rejection of the applicant s financial bid or the resolution plan. Invocation of Bid Bond Guarantee is a penal action as per the terms of the Process Note. The mere saving of the right of the CoC or the Resolution Professional to continue with the applicant s Financial Bid or the Resolution Plan even after invocation of the Bid Bond Guarantee would not change the purpose of taking Bid Bond Guarantee neither the penal nature of invocation of the guarantee. The invocation of the Bid Bond Guarantee was on account of non-submission of performance guarantee by the successful Resolution Applicant. The CoC was within its rights to invoke the Bid Bond Guarantee as per the terms of the Process Document, Bid Bond Guarantee and Letter of Intent. However, this can t be denied that information uploaded on VDR, which was the very basis of submission of the resolution plan was based on misinformation and was based on M. M. Report 2016, which was admittedly prepared for the particular purpose for invitation of investment. The Resolution Professional and the CoC is directed to invite the fresh offers withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter dated 17.10.2018, conveyed its decision to withdraw the Resolution Plan that has been approved by the CoC and filed for approval of the Adjudicating Authority. 5. It is stated that Deccan was looking to negotiate the terms of the Resolution Plan with the CoC and to show its bona-fides, the validity of the Bid Bond Guarantee was extended till 30.11.2018. On 23.10.2018, the CoC is said to have invoked the Bid Bond Guarantee submitted by Deccan and have further directed Deccan to comply with their obligations under the Resolution Plan. Thus, it is alleged that the CoC is pressurising Deccan to fulfil its obligation under a Resolution Plan that is vitiated in law. 6. Deccan submits that the new information provided to it was significantly at variance from the information made available to it for the due diligence exercise before the submission of the Resolution Plan. It is alleged that net realistic capacity of the Corporate Debtor was shown as being 210,747 Tons per annum(TPA) as per the information available in the virtual data room, which was more than 3 times the annual maximum achievable production, as stated by the team of the Resolution Professional and management of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available with the Resolution Professional at the relevant time, and access to this data room was given to the Resolution Applicant, Deccan along with other prospective resolution applicants. The Resolution Professional also arranged for site visits of the Corporate Debtor s plants or factories on 19.03.2018 and 20.03.2018 for Deccan. 12. It is stated that the financial bids were only submitted by three potential resolution applicants, namely Liberty House Group, Deccan Value Investors (Deccan) and Bharat Forge Limited. Out of these three, Deccan submitted highest bid and was declared as H1 bidder at the 6thCoC meeting held on 08.05.2018. Deccan submitted the Bid Bond Guarantee dated 13.04.2018 for ₹40crore on 20.04.2018. The resolution plan of Deccan was approved by 87.57% vote of the CoC on 25.08.2018. The Resolution Professional filed an application under section 31 of the I B Code for approval of the Resolution Plan as approved by the CoC on 29.08.2018. The CoC on 28.08.2018 issued a Letter of Intent in favour of Deccan, who in turn duly accepted the same on 28.08.2018. As per the terms of the Letter of Intent, Deccan was to submit a performance guarantee for ₹10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right, is affected at this stage. This is also made clear by the first proviso to Section30(4), whereby a Resolution Professional may only invite fresh resolution plans if no other resolution plan has passed muster. . 79. Take the next stage under Section 30. A Resolution Professional has presented a resolution plan to the Committee of Creditors for its approval, but the Committee of Creditors does not approve such plan after considering its feasibility and viability, as the requisite vote of not less than 66% of the voting share of the financial creditors is not obtained. As has been mentioned hereinabove, the first proviso to Section 30(4) furnishes the answer, which is that all that can happen at this stage is to require the Resolution Professional to invite a fresh resolution plan within the time limits specified where no other resolution plan is available with him. It is clear that at this stage again no application before the Adjudicating Authority could be entertained as there is no vested right or fundamental right in the resolution applicant to have its resolution plan approved, and as no adjudication has yet taken place. 81. If, on the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Resolution Professional. Under the Process Note issued by the Resolution Professional on behalf of the CoC, it was made abundantly clear to all resolution applicants, including Deccan that the onus of carrying out all requisite site visits and diligence was on the Resolution Applicant. It is submitted that the Resolution Professional or the CoC cannot be held responsible for the accuracy of information made available in the virtual data room. 18. In terms of the Process Note, the Resolution Applicants were required to and deemed to have carried out their diligence, and the CoC and Resolution Professional were not responsible or liable in respect of any statements or omissions herein, or the accuracy, correctness, completeness or reliability of the information provided; 19. Deccan was expected to independently assess the veracity of the reports provided by the Resolution Professional on the virtual data room and not place reliance on them without carrying out independent diligence, as is also clear from the terms of the Process Note. Under such circumstances, Deccan, having agreed to the terms of the Process Note and participating in the resolution plan process, cannot att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue as being from manufacturing . The Resolution Applicant now wants to blame the Resolution Professional for this exercise done by them, on their own, is unsustainable. 26. It is submitted that as far as the historical statements are concerned, the Corporate Debtor is listed on both BSE and NSE and the financial information for at least past five years is available to the public as required under the SEBI (LODR) Regulations. 27. The Resolution Professional also provided detailed financial information to all the potential resolution applicants with plant wise profit and loss statements, including specific classification of the revenue during those years into Manufacturing and Trading / Metals ; turnover of the Corporate Debtor for financial year 2016, financial year 2017 and the period between April 17 to September 17, as was made available to the Resolution Professional. Furthermore, the Resolution Professional s team had also shared the detailed financial information and operational information for December 2017 till March 2018, to provide the most updated information possible. Similar information was also shared with the Applicant during the meetings in September and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfirmed that there is no damage. 33. Deccan has made strenuous attempts to rely upon the Mott McDonald Report dated 30th September 2016. It is submitted that the management of the Corporate Debtor prepared said Report for a potential investment. It is worth noting that Respondent No. 3 had originally not placed the said Report in the VDR , firstly, because it was dated, and secondly because it was prepared for a purpose not related to the resolution process. The MM Report was placed in the VDR, only on the Applicants request. 34. It is stated by the Resolution Professional that in the Process Note, he made no representations to Deccan about the veracity of the Mott McDonald Report. Moreover, at the meetings held on March 2018, he gave Deccan data about the actual levels of production achieved in the two months in which the Resolution Professional was in charge, which as indicated above, were lower than the MM Report. 35. It is stated that Deccan s reliance on the Mott McDonald Report was clearly at their risk and they cannot attempt to foist the blame about such reliance, upon the Resolution Professional or the COC. 36. It is submitted that the bid bond guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Resolution Plan of Deccan. By the said letter, CoC had also expressly objected to the withdrawal of the Resolution Plan of Deccan. The Resolution Professional thus submits that Deccan s submission that the CoC and Resolution Professional have accepted the withdrawal of the Resolution Plan of Deccan or accepted the repudiation of the Resolution Plan of Deccan is wholly misconceived and contrary to the terms of the Process Note. 41. The CoC has filed its Affidavit in Reply dated 07.12.2018 for opposing the application of Deccan and the reliefs sought in it. It is stated that Deccan was responsible for carrying out their due diligence and that the members of the CoC did not take any responsibility for the accuracy of the information provided to Deccan. The clause 1.7.3 of the Process Note makes the resolution plan submitted by a resolution applicant irrevocable and binding and cannot be amended except pursuant to (a) instructions of the Resolution Professional or the CoC, due to the Resolution Plan not meeting any requirement under the Process Note or any other condition/requirement stipulated by the CoC and (b) the negotiations held with the CoC or to meet the requirements of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Plan, the Applicants discovered that the entire basis and making of Deccan Resolution Plan has been vitiated by non-disclosure of material facts and documents; Deccan Resolution Plan is vitiated by the vices of suppression, misrepresentation and/or mistake; and in any event, Deccan Resolution Plan can no longer be considered viable or implementable. This is essential, because of the large discrepancy between the representations made by the Resolution Professional and the COC about the actual, realistic position of the technical capacity of the Corporate Debtor, its operations, and its assets.It is submitted by Deccan, that the past financials of the Corporate Debtor indicate that a turnover of more than ₹2000 crores was regularly achieved by the Corporate Debtor and such turnover was based on the production capacity of the Corporate Debtor. Further, the 2016 MM Report, uploaded by the Resolution Professional in the VDR, which assessed the net realistic capacity of the Corporate Debtor at 210,747 MTPA was later disavowed by the Resolution Professional stating that the Resolution Professional has no responsibility of the accuracy of the data furnished in the VDR and that the 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduction ever achieved by each machine, in any month. 50. On the realistic and actual basis of the technical production capacity of the Corporate, the Applicants submit that a resolution plan on the basis of the actual and realistic technical capacity of the Corporate Debtor would further establish the Applicants' case that Deccan Resolution Plan is unviable, unfeasible, and incapable of implementation; the facts that were disclosed subsequent to submission of Deccan Resolution Plan have entirely displaced the basis thereof, as is clear from the tabular representation hereunder: 51. Deccan has pointed the discrepancy between the representation made by the Resolution Professional on which Deccan formulated its Resolution Plan and the actual undisputed production capacity of the Corporate Debtor as under: Corporate Debtor s Production Capacity [in MTPA] Represented by the Resolution Professional in the 2016 MM Report Projected by the Applicants in Deccan Resolution Plan Actual position 210,747 110,000 Approx. maximum 66,000 52 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be noted that once the CIRP is admitted against the Clover, the Resolution Professional cannot enter into a lease agreement with the Clover for the 12.5K ton Press as the fate of the lease agreement would be dealt in the resolution plan approved by the CoC of Clover. 56. Ld. Counsel for the applicant has emphasised on the Resolution Professional s legal duties and obligations as provided under I BCode. The applicant contends that Resolution Professional has statutory obligations to act fairly, independently and as an officer of Adjudicating Authority. As an officer of the court, the Resolution Professional is expected to act fairly, reasonably and objectively in his deals with all stakeholders in the CIRP, without adopting an adverse position. His conduct, therefore, has to meet with the test of judicial review and be in terms of IBC and the regulations that govern his conduct. 57. In this regard, it was pointed out that the Report of Bankruptcy Law Reforms Committee, November 2015 (BLRC Report) envisaged the role of Resolution Professionals an agent of Adjudicating Authority. It is imperative here, to note certain relevant clauses of the said report. 58. Clause 4.4 set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the entity. The RP has the power to appoint whatever outside resources that she may require in order to carry out this task, including accounting and consulting services. 2. The information collected on the entity is used to compile an information memorandum, which is signed off by the debtor and the creditor's committee, based on which solutions can be offered to resolve the insolvency. In order for the market to provide solutions to keep the entity as a going concern, the information memorandum must be made available to potential financiers within a reasonable period of time from her appointment to the IRP. If the information is not comprehensive, the RP must put out the information memorandum with a degree of completeness of the information that she is willing to certify. For example, as part of the information memorandum, the RP must clearly state the expected shortfall in the coverage of the liabilities and assets of the entity presented in the information memorandum. Here, the asset and liabilities include those that the RP can ascertain and verify from the accounts of the entity, the records in the information system, the liabilities submitted at the star ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rage of liabilities and assets of the entity presented in the Information Memorandum. The Resolution Professional also must make sure that the information is readily available to whosoever is interested in bidding, a solution for Insolvency Resolution Process. Given the duties as prescribed in the BLRC Report, it is clear that Resolution Professional becomes the manager of the negotiation between the debtors and creditors in accessing the viability of the entity. 62. In the said report, in clause 4.4, it is stated that: This entire insolvency and bankruptcy process is managed by a regulated and licensed professional namely the Insolvency Professional or an IP, appointed by the adjudicator. In an insolvency and bankruptcy resolution process driven by the law, there are judicial decisions being taken by the adjudicator. But there are also checks and accounting as well as conduct of due process that are carried out by the IPs. Insolvency professionals form a crucial pillar upon which rests the effective, timely functioning as well as credibility of the entire edifice of the insolvency and bankruptcy resolution process. In administering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a backdrop against which relative rights and risks can be assessed and help define the limits of any discretion. ... 12. An insolvency law should ensure that adequate information is available in respect of the debtor's situation , providing incentives to encourage the debtor to reveal its positions and, where appropriate, sanctions for failure to do so. The availability of this information will enable those responsible for administering and supervising insolvency proceedings (courts or administrative agencies, the insolvency representative) and creditors to assess the financial situation of the debtor and determine the most appropriate solution. 64. The Court has while discussing the history and purpose behind the enactment of the IBC, set out in Innoventive Industries Ltd vs ICICI Bank (2008) 1 SCC 407 as under: .the important paragraphs contained in the Report of the Bankruptcy Law Reforms Committee of November 2015, as these excerpts give us a good insight into why the Code was enacted and the purpose for which it was enacted: .. II. The Code will enable the symmetry of information between creditors and debtors. (5) The law must ensure that informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the Resolution Professional is himself is struggling in managing the business and is not an Industry Person in most of the cases. During Due Diligence process, a prospective acquirer takes stock of the Asset by looking at the company data, walking around sites and doing third party diligence , is one of the most critical areas of any, but is often considered as customary and left to advisers. 70. The facts, information and material, as noted in preceding paragraphs, make it clear that Deccan Resolution Plan was based on misleading MM Report 2016 uploaded in VDR, and this has rendered the entire Resolution Plan un-viable, un-feasible and that cannot be successfully implemented. By subsequent event, there remains least possibility of getting the lease of sister concerns land i.e.Clover land,because of initiation of CIRP Process separately against the company Clover itself, for installation of 12500 MT Press , will also makes the Resolution Plan unviable. 71. It appears that Resolution Plan was submitted on the presumption of increased additional production capacity, on account of further installation of 12500 MT Press. The RP had assured the Resolution Applicant that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the resolution plan as provided in the Resolution Process Regulations provides that the resolution plan should be feasible and viable, and it has provides for effective implementation.It is thus clear that the facts disclosed after submission of Deccan Resolution Plan have entirely displaced the basis thereof and the resolution plan of Deccan is unviable, unfeasible, and incapable of implementation based on the actual and realistic technical capacity of the Corporate Debtor. 76. In the present case, undisputedly MM Report 2016 which contained,incorrect and unrealistic information, was uploaded on the VDR, which is created as a data centre to facilitate the resolution applicants to carry out their due diligence. The huge discrepancy in the vital and fundamental information such as the production capacity of the Corporate Debtor and financial information would undoubtedly raise questions on the credibility of the resolution plan. Further, the 12.5K ton Press is an important part of the resolution plan and due to the non-availability of land uncertainty looming over the fate of the said Press. But the admission of CIRP against the Clover has further made the resolution plan un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents, including specific classification of the revenue during those years into Manufacturing and Trading / Metals for the period between April 17 to September 17, as was made available to the Resolution Professional. Furthermore, the Resolution Professional s team had also shared the detailed financial information and operational information for December 2017 till March 2018 to provide the most updated information possible. Similar information was also shared with the Applicant during the meetings in September and October for April 2018 till June 2018. 80. The applicant had extended the validity of its bid bond guarantee till 30.11.2018 however, it was the COC that immediately invoked the bid bond guarantee on 23.10.2018, instead of negotiating with the applicant. The act of applicant in extending the bid bond guarantee reflected its bona fides. However, it was the hasty decision of the COC to invoke the bid bond guarantee, even after extension OF THE BBG period, has derailed the entire process 81. As regards the invocation of the BBG, while perusing the process note, we have observed that the Phase-II of the Resolution Plan Process is divided into Two Stages where in Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BBG is to be submitted by an applicant at the initiation of the resolution plan process at Stage-I and is returned when either the applicant is not shortlisted at Stage-I or not successful in Stage-II or when he submits the performance guarantee. In other words, the BBG is returned to an applicant when the applicant, either, exists the resolution plan process on account of being eliminated by the CoC or the Resolution Professional or when he is finally declared as the successful resolution applicant and has submitted the performance guarantee. 86. The Clause 1.8.4 and 1.8.5 of the Process note are particularly important for our present purposes as they deal with the Forfeiture of the Bid Bond Guarantee of the Applicant, the said clauses are reproduced below for quick reference: 1.8.4 Forfeiture of Bid Bond Guarantee of the Applicant i) MFL shall be entitled to invoke the Bid Bond Guarantee where (a) the Applicant fails to provide the Bid Bond Guarantee in accordance with Clause 1.8.1 herein; or (b) in case of any non-compliance with the Resolution Plan Process or unilateral change by the Shortlisted Applicant to the Resolution Plan submitted by it; or (c) in case of non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re breached by the relevant Applicant this also would lead to rejection of the Financial Bid. 88. Thus, the purpose of the Bid Bond Guarantee is to serve as security for adherence to conditions contained in the Process Note or Letter of Intent and it is invoked to penalise the applicants for their non-compliance. Every time the Bid Bond Guarantee is invoked, it is co-incident with the rejection of the applicant s financial bid or the resolution plan. Invocation of Bid Bond Guarantee is a penal action as per the terms of the Process Note. The mere saving of the right of the CoC or the Resolution Professional to continue with the applicant s Financial Bid or the Resolution Plan even after invocation of the Bid Bond Guarantee would not change the purpose of taking Bid Bond Guarantee neither the penal nature of invocation of the guarantee. 89. As per the terms of the Letter of Intent, the Process Note and the Bid Bond Guarantee, the Successful Resolution Applicant was required to submit the Performance Bank Guarantee on or before 08.09.2018. Deccan admittedly did not submit the Performance Bank Guarantee till 23.10.2018, and therefore the CoC invoked the Bid Bond Guarantee strict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. When, therefore, a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks and financial institutions. Above all, ultimately, the interests of all stakeholders are looked after as the corporate debtor itself becomes a beneficiary of the resolution scheme workers are paid, the creditors, in the long run, will be repaid in full, and shareholders/investors are able to maximise their investment. Timely resolution of a corporate debtor who is in the red, by an effective legal framework, would go a long way to support the development of credit markets. Since more investment can be made with funds that have come back into the economy, business then eases up, which leads, overall, to higher economic growth and development of the Indian economy. What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roviso by virtue of the Amendment Bill, 2019 with effect from 16.08.2019, by which the resolution process may be permitted to be completed within 90 days from the date of the commencement of the Amendment Act. The said period is available upto 15th November 2019. Reliance has also been placed on a decision of this Court in Arcelormittal India Pvt. Ltd Vs. Satish Kumar Gupta and Ors. , reported in (2019) 2 SCC 1. Without deciding the aforesaid issue finally, the learned counsel for the parties have agreed that one more effort should be made to resolve the issue. It was also pointed out that expression of interest have already been indicated by eight other parties. The learned Solicitor General has also submitted that the Resolution Professional may be permitted to invite the fresh offers within a period of 21 days as an earlier offer had been invited and considering the time limit of 15.11.2019, 21 days may be fixed instead of 30 days for submission of the offer. We permit the Resolution Professional to invite fresh offers within a period of 21 days. Let steps be taken by the Resolution Professional by tomorrow i.e. by 25.09.2019 for invitation of the fresh offers in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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