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TMI Blog2024 (5) TMI 789X X X X Extracts X X X X X X X X Extracts X X X X ..... , acting as a subcontractor, did not contribute to the Corporate Debtor's viability as a going concern. This pivotal factor led Respondent No. 2, in its capacity as the Resolution Professional, to exclude the costs incurred by Respondent No. 1 from the ambit of CIRP Costs. It is agreed that mere fact that the dues have arisen during the CIRP period would not be determinative of it to be classified as CIRP cost. Interpreting Section 5(13)(c) of the Code in this manner would render the words in running the business of the corporate debtor as a going concern otiose. Further, it is clear from Regulation 31 and the guidance provided by IBBI vide the above-mentioned circular that unless the CoC has approved the dues and they directly relate to the CIRP, the dues cannot be classified as CIRP cost. And the CoC decided to exclude the cost incurred from the terminated projects, which is not maintaining the Corporate Debtor as a going concern . In conclusion, the following criteria determine whether a cost incurred by the Resolution Professional during CIRP qualifies as CIRP cost: (a) maintaining the Corporate Debtor as a going concern, (b) payment to suppliers of essential goods and serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SHEL) to construct CW Systems and MUW Systems Civil Works for the Darlipali Super Thermal Power Project, Odisha. On February 27, 2018, the Corporate Debtor (SHEL) entered into a sub-contract with Respondent No. 1/ M/s RBM Enterprises, appointing it to fabricate and erect CW ducts at the NTPC project site at Darlipali, Odisha. The work order was issued in favor of Respondent No. 1 and was a sub-contract under the main contract executed between the Corporate Debtor and National Thermal Power Corporation Limited ( NTPC ) on back-to-back basis. In September 2018, the Adjudicating Authority initiated the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor and appointed Mr. Harshad Deshpande as the Interim Resolution Professional (IRP). Following this, a public announcement was made inviting claims from creditors. Subsequently, Mr. Ashish Rathi was appointed as the Resolution Professional (RP), and later on an Interlocutory Application for liquidation of the Corporate Debtor was filed and admitted in June 2019. 3. As per the Liquidation Order, Mr. Avil Menezes, the Appellant, was appointed as the liquidator. Upon his appointment, the Appellant invited claims from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( Liquidation Order ) and Mr. Avil Menezes, the Appellant herein was appointed the liquidator of the Corporate Debtor. The Appellant as liquidator in turn invited claims by publishing the Public Announcement as required by Regulation 12 of the Liquidation Regulations, 2016. 9. The Appellant- liquidator received a claim dated 26.07.2019 filed by Respondent No. 1 claiming an amount of INR 1,36,41,854/- (Indian Rupees One Crore Thirty-Six Lakhs Forty One Thousand Eight Hundred and Fifty Four Only) out of which, Rs. 1,25,84,249/- (Indian Rupees One Crore Twenty- Five Lacs Eighty-Four Thousand Two Hundred and Forty-Nine Only) was for work completed by Respondent No.1 during the CIRP Period and Rs.10,57,605/- (Rupees Ten Lakhs Fifty Seven Thousand Six Hundred and Five only) was for work before CIRP period. This claim pertains to the execution of fabrication and erection works of CW ducts at the project site at Darlipali. 10. Pursuant to the Liquidation Commencement, Respondent No. 2, i.e., the erstwhile Resolution Professional of the Corporate Debtor had provided the Appellant with an estimated overall CIRP Costs incurred during the CIRP. However, there was a significant difference in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent No.1 were not classified as CIRP costs by Respondent No. 2 and, therefore, the Appellant cannot treat the claim of Respondent No. 1 as a CIRP cost. And the same would be distributed following Section 53 of the Code. 14. Being aggrieved, Respondent No. 1 filed an Interlocutory Application No. 162 of 2021 before the Hon ble Adjudicating Authority. Vide Order dated 14.12.2021, Adjudicating Authority directed the Respondent No.1 to submit his claim to the Appellant, and the Appellant was directed to process the amount claimed on merits as per Rules and Regulations of the Code. After due consideration of the submitted claim and in compliance with the Order of the AA dated 14.12.2021, the Appellant informed Respondent No. 1 that its claim cannot be considered or treated as CIRP Cost as the same is not considered as CIRP Cost by Respondent No. 2 and will be paid as per Section 53 of the Code. 15. Being aggrieved by the decision of the Appellant, Respondent No. 1/subcontractor once again preferred the captioned Interlocutory Application No. 535 of 2022 under Section 42 and Section 53 of the Code before the Adjudicating Authority, which in turn allowed the claims to be treated as CIRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, this was also not considered as a part of the CIRP cost when Liquidator convened another meeting of the Creditors. Hence, the Applications is liable to be rejected. Accordingly, this IAs are dismissed as rejected . 19. The Appellant submits that the Adjudicating Authority was bound by the doctrine of stare decisis, which forbids the tribunal/courts from taking any view opposite to its earlier decisions. Issues in the captioned Application have already been adjudicated by the Adjudicating Authority in I.A. No. 162 of 2021 filed by Respondent No. 1. Therefore, the captioned Application was barred by principles of res judicata. The Appellant submits that the Adjudicating Authority was bound by the principles of res judicata. 20. The Applicant submits that it is evident from the Application filed by Respondent No.1 that dues up to INR 10,57,605/- (Rupees Ten Lakhs Fifty Seven Thousand Six Hundred and Five only) are for works before the CIRP Period. Therefore, the same cannot be classified as the CIRP Period. 21. The interpretation of CIRP cost by the Adjudicating Authority ignores the various qualifications in Section 5(13) and Regulation 31 of the CIRP Regulations. In respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect, and where payments were not received, those dues would be treated as having not been incurred to keep the Corporate Debtor as a going concern. Accordingly, the resolution professional and the Appellant herein followed the decision of the CoC and did not treat Respondent No. 1 s claim as CIRP cost. 26. The Appellant relies on this Tribunal s judgment in Bharat Hotels Ltd. v Tapan Chakraborty Company Appeal (AT) (Insolvency) No. 1074 of 2022 where it was held that Question of cost and its approval lays in the domain of the CoC. The CoC may ratify, modify or set aside the cost claimed. These issued may be decided in the meeting of the CoC and are not to be examined by the Adjudicating Authority even before the CoC takes a decision. It shall be always open for the appellant to raise issue regarding the cost in the meeting of the Committee of Creditors. This position was also restated in Mehul Parekh and Ors. v. Unimark Remedies and Ors. Company Appeal (AT) (Ins) No. 839 of 2023. It is clear from the Judgements that the AA erred by entering the field of the CoC s commercial decision. 27. Further, as the CoC had taken a policy decision regarding the cash flows from each project for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is sufficient proof of the fact that the Respondent had, on the basis of specific directions of the Resolution Professional, continued to provide services to the Corporate Debtor, and the Resolution Professional has approved the said invoices of the Respondent during the CIRP of the Corporate Debtor. Corporate Debtor, has specifically handed over a Confirmation of Account dated April 2019, which is signed and confirmed by the senior executives of the Corporate Debtor, i.e., Engineering Project, Deputy General Manager Accounts under the control of RP. Resolution Professional, have confirmed the outstanding payable to the Respondent of Rs. 1,25,84,249/- for the work done by the Respondent during the CIRP period. Under such circumstances, it is totally false upon the Appellant to state that since the project was completed during the CIRP period, the same cannot be attributed as CIRP cost. 32. Further as per Section 5(13)(c), any costs incurred by the resolution professional in running the business of the corporate debtor as going concern shall be classified as CIRP cost and hence the claim of the Respondent No. 1 was within the ambit of the said provision. 33. The Liquidator has rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on the availability of funds. The CoC members stated that the Company officials and the RP should ensure certain cut back to meet other costs of the Corporate Debtor and to take care of the CIRP costs 37. Further, the CIRP expenses were also discussed in the 10th CoC meeting held on June 03, 2019 and the relevant extract of minutes are as under: Agenda Item No. 4 - To take note of the Corporate Insolvency Resolution Process ( CIRP ) expenses. The RP then presented the CIRP costs till date to the members and stated these are approximate numbers, and that the costs required to be incurred till final orders are passed u/s 31 or u/s 33 would also be CIRP cost. The RP also added that costs relating to sites which are inactive or have been terminated earlier/during the CIRP may not form a part of CIRP cost, as the CoC had authorized payments for the sites out of the cash flows being received from such sites, and as per the Code, the test was whether the costs are required to be incurred for the organization to function as a going concern. The RP then also presented the breakup of amounts. The members noted the same. 38. From the extracts of the minutes of the CoC, it is clear that a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Regulation 33; (d) expenses incurred on or by the resolution professional fixed under Regulation 34; and (e) other costs directly relating to the corporate insolvency resolution process and approved by the committee. [ Emphasis Supplied ] It would be apparent from the highlighted portion of the Regulation that costs would be CIRP costs if they are directly related to the Corporate Insolvency Resolution Process and also approved by the Committee of Creditors (CoC). And in this case CoC had not approved for it to the treated as CIRP costs. 41. Another dimension which is peculiar to the facts of the case, is the contractual condition, specifically clause 5 which relates to back-to-back contract. The RP had classified the projects into different categories as follows and was treating them differently for CIRP costs- 1) Active Projects - where work is still going on, or the project is near completion date or certain payments are due. 2) Stalled during the CIRP period -Projects where work was stalled during the CIRP process was going on. 3) Inactive Projects- Projects which were stalled before commencement of CIRP process. project subcontracted at a percentage of the revenue from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s viability as a going concern. Given that the Corporate Debtor was functioning as a contractor, its ability to fulfil financial obligations hinges upon the receipt of payments from NTPC. This dependency is also underscored by Clause 5 of the commercial terms outlined in the back-to-back contract executed on 17th February 2018 with Respondent No. 1, stipulating that payments to Respondent No. 1 are contingent upon NTPC's disbursement. Consequently, both within and outside the purview of the Corporate Insolvency Resolution Process (CIRP), the Corporate Debtor remains bound by the contractual obligation to remunerate Respondent No. 1 solely upon the receipt of funds from NTPC. Until such time, the obligation to compensate Respondent No. 1 does not crystallize, emphasizing that the costs incurred in relation to Respondent No.1 cannot be construed as necessary for preserving the Corporate Debtor's status as a going concern. In essence, the Corporate Debtor's financial health and ability to honor its commitments are intricately linked to the timely receipt of payments from NTPC. Therefore, any expenses related to Respondent No. 1 cannot be deemed essential for maintainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o an absurd situation that the vendors of these sites would get priority over the payments in waterfall mechanism under section 53 of the Code, even in a situation when there are no cash inflows from that particular project, and that might encroach upon the rights of the other stakeholders who would otherwise have priority in the waterfall mechanism. 45. Such a finding also goes against the existing legal provisions and precedents and the facts of the case as noted in the subsequent paragraphs. 46. Moreover, such decisions need the approval of the CoC as is clear from the Section 5(13) of the Insolvency and Bankruptcy Code, 2016 and also Regulation 31 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 which says that Insolvency resolution process costs under Section 5(13)(e) shall mean .. other costs directly relating to the corporate insolvency resolution process and approved by the committee. 47. The Appellant has tried to rely on other similarly situated claims for payment as CIRP cost in which the Adjudicating Authority vide order dated 21.01.2022 in IA 1810, 1812, 2583 and 25987 has taken opposite view and has held that We observe that there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne by the corporate debtor; and (c) only the IRPC, to the extent not paid during the CIRP from the internal sources of the Corporate Debtor, shall be met in the manner provided in section 30 or section 53, as the case may be. 8. It is clarified that the IRPC shall not include : (a) any fee or other expense not directly related to CIRP; (b) any fee or other expense beyond the amount approved by CoC, where such approval is required; (c) any fee or other expense incurred before the commencement of CIRP or to be incurred after the completion of the CIRP; (d) any expense incurred by a creditor, claimant, resolution applicant, promoter or member of the Board of Directors of the corporate debtor in relation to the CIRP; (e) any penalty imposed on the corporate debtor for noncompliance with applicable laws during the CIRP; [Reference: Section 17 (2) (e) of the Code read with circular No. IP/002/2018 dated 3rd January, 2018.] (f) any expense incurred by a member of CoC or a professional engaged by the CoC; (g) any expense incurred on travel and stay of a member of CoC; and (h) any expense incurred by the CoC directly; [Explanation: Legal opinion is required on a matter. If that matter is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was not to be entertained. The Appellant asked Resolution Professional to disclose item wise insolvency resolution process costs in such manner as required by the Board (IBBI). Question of cost and its approval lays in the domain of the CoC. The CoC may ratify, modify or set aside the cost claimed. These issued may be decided in the meeting of the CoC and are not to be examined by the Adjudicating Authority even before the CoC takes a decision. It shall be always open for the appellant to raise issue regarding the cost in the meeting of the Committee of Creditors. With reference to the grievance of the Appellant with regard to obtaining valuation report, it is always open to the Appellant to request the Liquidator to obtain a valuation report, if not already obtained. With these observations, the Appeal is dismissed. 52. This position was also restated in Mehul Parekh and Ors. v. Unimark Remedies and Ors. Company Appeal (AT) (Ins) No. 839 of 2023 where it has been noted that The direction to CoC to redetermine the CIRP cost after approval of the Resolution Plan by the CoC is unsustainable It is clear from these Judgements that the Adjudicating Authority erred by entering the f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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