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TMI Blog2024 (8) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... e lender. Thereafter on 24.03.2017, the IOB assigned the debt of the petitioner-company to M/s. Alchemist Asset Reconstruction Company Ltd., (hereinafter referred to as 'Financial Creditor/FC). b) The assignee of the loan, as a Financial Creditor moved the NCLT with an application under Sec.7 of the IBC against the petitionercompany for initiating a Corporate Insolvency Resolution Process (henceforth CIRP). The statutorily prescribed course of action commenced, accordingly an Interim Resolution Professional (IRP) was appointed, Committee of Creditors (IOB) was constituted, and it approved the resolution plan and submitted it, and on 06.12.2021 it was approved by the Adjudicating Authority, the NCLT. c) In terms of the resolution plan, only the financial creditor of the petitioner was partially benefited, since the value of the assets of the petitioner was far short of the value of the liability it faced. So far as Operational Creditors are concerned, the resolution plan directed that they would be paid pro rata at 1% of the value of their claim. The petitioner accordingly redeemed itself from the debt-trap it faced. d) While so, TANGEDCO, to which the petitioner owed arre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence, no proceedings in respect of such dues for the period prior to the date on which the adjudicating authority grants its approval to the resolution proposal will survive. Reliance was also placed on the ratio in Paschimanchal Vidyut Vitran Nigam Ltd. Vs Raman Ispat Private Limited and Others [2023 SCC OnLine SC 842], and Committee of Creditors of Essar Steel India Limited, through authorised signatory Vs Satish Kumar Gupta and Others [(2020) 8 SCC 531]. 5.1 Per contra, representing the TANGEDCO, Mr.J.Ravindran, the Additional Advocate General, submitted that it may be that under the scheme of IBC, TANGEDCO might be an operational creditor, but inasmuch as TANGEDCO's activities are governed by the Electricity Act, 2003, and the Electricity Supply Code, it cannot forego its claim. Reliance was placed on the ratio in State Tax Officer Vs Rainbow Papers Ltd., [2022 SCC OnLine SC 1162] ; K.C.Ninan Vs Kerala State Electricity Board and Others, [2023 SCC OnLine SC 663 (para 117, 341)], and M/s.Empee Distilleries Limited Vs The Superintending Engineer, Pudukottai, Electricity Distribution Circle, Pudukottai [WP(MD) No.14198 of 2022 dated 10.11.2022]. 5.2 On the strength of the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing away with the chunks, and the operational creditors forced to settle for the crumbs which the IBC regime generously feed them with. 7. The TANGEDCO, a statutory entity, a Generator cum Distribution licensee of electricity in this state, with a claim of around Rs.32.0 lakhs, does not figure anywhere in the scheme of this Resolution Plan, as it has not preferred a claim before the Interim Resolution Professional pursuant to the public notice issued at the instance of the Adjudicating Authority under the IBC (read the same as NCLT). After all, TANGEDCO is only an Operational Creditor within the definition of the term under Sec.5 (21) of the IBC, for whose money and loss the IBC shows scant respect or concern. (But the legislation is still valid). Curiously enough, the petitioner also did not disclose its dues to TANGEDCO in its Resolution Plan. 8. TANGEDCO, very innocently demanded its dues, but the petitioner has a prompt response to it: "We had one great holy dip in the IBC, and all our sins are washed away. Today, we are a new born, with a clean-slate balance sheet, with all assets and no liability. Hence, we owe TANGEDCO nothing. And if there are any doubts, read Ghanashyam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reject nor ignore. This obligation is defined by a realization that every citizen in this country is an equal citizen and every ounce of property one possesses in this country is precious. If right to dignified existence in this country has to have any meaning beyond the rhetoric that we are often fed with, then its inalienability to right to property deserves a special recognition. The sense of justice of the Court is summoned every time the individual right to property faces a conflict. It is here the interest of the operational creditors has drawn the notice of this Court and the possibility for potential misuse of the IBC and the regime it has created has become a source of its concern. 11.2 Pursuit to justice shall not let to be hindered by any attitude that may find appreciation in a School of Mathematics. The existential relevance of Courts as an institution to the citizenry of this country depends on its strength to identify those rights in crisis within the structure of the Rule of Law which the Constitution of this country advocates with pride, and its ability to evolve a solution. The terrain may be plain or may be treacherous. But the Courts should not plea helplessne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the reasons behind this move appears to be the rampant misuse of the moratorium provided under Sec.22. One noticeable difference which is instantly visible on a broader comparison of SICA and the IBC is that while SICA was debtor driven, the IBC is financial creditor driven. In effect the soul of the IBC appears to be that which the Parliament has junked vis-à-vis the SICA. 14.2 The IBC aims to settle the corporate creditors with minimal damage to the existential possibilities of a corporate debtor. Surely on paper it appears to provide possibilities of a win-win situation, something which the draftsmen of IBC may elate about. In that sense IBC may be acclaimed as a path breaking legislation, but it is doubtful if it has broken the path without breaking the back of some of the stakeholders - more particularly the Operation creditors. How secured are the operation creditors under the IBC regime? This requires a dispassionate understanding of the scheme of the IBC and the judicial pronouncements on its working. They are provided below. 15. It commences with a situation where the corporate debtor (which by definition under Sec.3(8) read with 3(7) means a company or a limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent the powers of the Board of directors of the corporate debtor will stand suspended (Sec.17). e) Under Sec.18, the IRP is required to prepare an asset and liability statement of the corporate debtor, and this may include such claims he may have received pursuant to the public notice issued by the NCLT under Sec.13. Now, notwithstanding the suspension of the Board of Directors of the corporate debtor under Sec. 17(1)(b), in terms of Sec.19, the Board of the corporate debtor is still under a statutory obligation to extend its assistance and co-operation to the IRP, and is duty bound to provide all necessary information to him or her. Indeed, on its failure to provide necessary assistance or cooperation, the NCLT has the power to direct the suspended Board of the corporate debtor to provide the same to the IRP. f) The next significant responsibility of the IRP is to constitute a Committee of Creditors (CoC) once he completes the preparation of the asset and claims statement of the creditors of the corporate debtor. As per Sec.21 of the IBC, only financial creditors will have the right to be part of the CoC, and the only circumstance when the financial creditor or its representa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what they may have obtained in a liquidation proceedings or that they would have obtained in the order of priority in the liquidation proceedings as provided under Sec 53(1), whichever is higher. But the most significant part of this activity is that the RP is required to ensure in terms of Explanation I of Sec.30(2) that "distribution in accordance with this clause shall be fair and reasonable to such creditors", which contextually mean the 'operational creditors'. Some small mercy for the operational creditors, or is it a condescending care that IBC extends? l) Under Sec.30(4) the CoC is required to approve the resolution plan with a minimum of 66% vote in favour of the said plan. And, under Sec.31 this resolution plan as approved by the CoC is required to be approved by the Adjudicating Authority, the NCLT, after it satisfies itself that the resolution plan has provisions for its effective implementation. This is provided in the Proviso to Sec.31(1). Necessarily it has the power to refuse approval if it is not so satisfied. 16. The legislative intent as conveyed through the body of the IBC highlights three aspects on the right of the operational creditors: (i) The operationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the IRP and the RP for outsmarting the interests of the operational creditors; and (ii) whether the CST is a panacea for the corporate ills (or is it evils?) of a corporate debtor. In short, the question would be whether the objective behind the IBC could be hijacked by private motives of those in whom the IBC has invested its trust - the trust the Parliament has invested; the trust the people of this country have invested. And if it could be, does it not impose a responsibility on the legal system of this country of which the courts are the sentinel on the qui vive to step in to shape up a just and fair outcome within the framework of law? 20. Having understood the scheme of the IBC, it is now time to navigate through the authoritative pronouncements of the Hon'ble Supreme Court. It is neither about the creation of two broad categories of creditors - the financial creditors and the operational creditors by the IBC, nor about the differential criterion which IBC has employed to define the character of both these categories of creditors, whose alleged inequality of status the Supreme Court has rejected on its way to uphold the constitutionality of the IBC in the Swiss Ribbons Case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not just one or many of its strands." This necessarily includes the right to enforce or secure the right to property, which we commonly understand as right of action. Ordinarily, a person with a claim has the right of action to enforce the claim before a neutral arbiter, be it the Court or a tribunal, both of which are positioned equidistantly from opposing claims. This is the minor premise. (f) IBC & Neutral Tribunal 23. It could now be derived that where a substantive right to property is in peril, the right of action before a neutral tribunal springs into action for obtaining justice in the cause. This is fundamental to our Constitutional jurisprudence. In Union of India Vs Madras Bar Association [(2010)11 SCC 1], a Constitutional Bench of the Supreme Court has held: "101. Independent judicial tribunals for determination of the rights of citizens, and for adjudication of the disputes and complaints of the citizens, is a necessary concomitant of the rule of law. The rule of law has several facets, one of which is that disputes of citizens will be decided by Judges who are independent and impartial; and that disputes as to legality of acts of the Government will be decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry to UDHR, there is a binding obligation on the Parliament of this country to provide a neutral forum for the operational creditors to present their claim. 24. However, the scheme of IBC provides for a two-tier mechanism for approval of a resolution plan - first by the CoC and next by the Adjudicating Authority. Now, unless the Adjudicating Authority is treated as a neutral tribunal for the operational creditors to defend and secure its right to property which they have in their claims against any perceived unfair and inequitable treatment meted out to them by the CoC, even if the CoC has acted bonafide, there is a lurking danger of IBC straying into the zone of unconstitutionality for breaching the dictum of the Constitution Bench in the Madras bar Association case. (g) Discussion on the Authorities 25. What then is the role which the Adjudicating Authority is expected to play? This issue, it must be said, is caught in the storm of court room debates, and there is a perception that it has left the role of the Adjudicating Authority on a plane of ambivalence, and it may have to be steered to clarity. And, it may not be discussed in isolation, as its understanding was influence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial forum. 25.2(a) However, in the Essar Steeel case [(2020)8 SCC 531], a three Judges bench of the Supreme Court had expanded the scope of the doctrine of commercial wisdom of the CoC and telescoped it into a situation to undo the effect of the interference which the Appellate Authority had when it brought in its perception of equitability and fairness vis-a-vis the approval granted by the Adjudicating Authority to the resolution plan placed before the latter. It may be stated in that case, the CoC constituted sub-committee of creditors (which it named as the core-committee of creditors) which engaged with the resolution applicant, and tweaked the original resolution plan which was later came to be accepted by the majority of the financial creditors in the CoC. In the process, the CoC voted out the financial creditor which initiated the CIRP and provided nothing significant for operational creditors. This resolution plan found favour with the Adjudicating Authority but not with the Appellate Authority. The Appellate Authority rejected the resolution plan on two scores: (i) that the Code does not provide for delegation of responsibility by the CoC to a sub-committee; and (ii) that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was followed by another three-Judge bench of the Supreme Court in the case of Ghanashyam Mishra and Sons Private Limited Vs Edelweiss Asset Reconstruction Company Limited [(2021) 9 SCC 657]. In the said case, the Supreme Court dealt with a batch of appeals wherein the statutory authority attempted to recover the statutory dues from the corporate debtor after a resolution plan had been approved. In the lead case, M/s Orissa Manganese & Minerals Ltd. went through CIRP. There were three resolution applicants who inter alia included Ghanashyam Mishra & Sons Private Ltd., and a certain M/s Edelweiss Asset Reconstruction Company Ltd. The plan of Ghanashyam Mishra was approved by the CoC and the plan of Edelweiss was not even admitted by the Resolution professional. Edelweiss challenged the nonadmission of its plan before the NCLT. Alongside, the workmen of the corporate debtor also challenged the resolution plan for not making any provision for the payment of their salary and statutory dues. The NCLT rejected both these applications. In appeal, the NCLAT upheld the rejection of Edelweiss's application, but allowed it to enforce the bank guarantee issued by the corporate debtor in an inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Officer Vs Rainbow Papers Ltd., [(2023) 9 SCC 545], Paschimmanchal Vidyut Vitran Nigam Ltd., Vs Raman Ispat Pvt. Ltd., & others [(2023) 10 SCC 60] and Sanjay Kumar Agarwal Vs State Tax Officer & another [(2024) 2 SCC 362] and M.K.Rajagopalan Vs Dr.Periasamy Palani Gounder & another [(2024) 1 SCC 42]. They are now considered : a) In the Rainbow Papers case, the facts that visited the Supreme Court was whether the statutory dues which was being litigated between the statutory authority and the corporate debtor and was pending even before the initiation of the CIRP against the corporate debtor is saved when the resolution plan that came to be approved by the CoC does not disclose the statutory dues. The RP defended it on the ground that the statutory authorities did not make a claim pursuant to the public notice. The Court held that the resolution plan is bad in law since the Adjudicating Authority did not ensure that all operational creditors are paid in terms of Sec.30(2) of the IBC. The Court also added that the statutory authority need not prefer a claim as contended by the RP, since this was disclosed in the books of accounts of the corporate debtor. In other words, the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial wisdom of CoC is given such a status of primacy that the same is considered rather a matter non-justiciable in any adjudicatory process, be it by the adjudicating authority or even by this Court. However, the commercial wisdom of CoC means a considered decision taken by CoC with reference to the commercial interests and the interest of revival of the corporate debtor and maximisation of value of its assets. This wisdom is not a matter of rhetoric but is denoting a well-considered decision by the protagonist of CIRP i.e. CoC. As observed by this Court in K. Sashidhar [K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150 : (2019) 4 SCC (Civ) 222] , the financial creditors forming CoC "act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject-matter expressed by them after due deliberations in CoC meetings through voting, as per voting shares, is a collective business decision." This Court also observed in K.Sashidhar [K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150 : (2019) 4 SCC (Civ) 222] that "[t]here is an intrinsic assumption that financial creditors are fully informed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup of self interested creditors. Until the Rainbow Papers case, it was not adequately brought to focus that unless the commercial wisdom of the CoC in approving a resolution plan conforms to the requirements of Sec.30(2), it may not pass the scrutiny of the Adjudicating Authority under Sec.31, even though the Essar Steel case has not overlooked this aspect. If Sec.30(2) is scanned for its nature, it imposes restriction on the freedom of the CoC to decide the way their collective wisdom may tempt them to decide, by casting a duty on them - to care for the operational creditors. This aspect will be specifically discussed later. 28.2 Therefore, to reduce an understanding of the phrase 'commercial wisdom of the CoC' - a coinage of the Supreme Court, as a synonym to the collective freedom of the CoC sans the duty which Sec.30(2) imposes will be a grand misconception. The Rajagopalan's case insistence to the CoC that its wisdom shall not selectively operate on limited information has ushered in the much needed responsibility to the thought process of the CoC. The rule of commercial wisdom of the CoC should now satisfy the test that in exercising it CoC should help itself with optim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion of this Court the declaration of the Supreme Court in the Essar Steel case on the absence of a fiduciary relationship between the CoC and operational creditors does not operate to undermine the effect of Explanation I to Sec.30(2). It can be explained. 31.2 There cannot be a dispute that there exists no fiduciary relationship between the CoC and the operational creditors, since for a fiduciary relationship to emerge between two persons or entities, there ought to be in existence an equation where they either share a mutual relationship in absolute confidence, or at least one investing all its confidence on the other. Now, given the fact that an operational creditor is as much a creditor as the financial creditor, and since an operational creditor's value for its money is no inferior to that of the financial creditors' (as they constitute right to property in their respective hands), and since both are competing to secure its right to property from the same source, it is inconceivable an operational creditor would have wasted its confidence by investing it on its competitor - read it as the financial creditor, or would have voluntarily outsourced its right to decide on what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes of Sec.30(2)(b) as a trustee of the operational creditor, fairness of its action cannot be exacted from it in terms of Explanation I to Sec.30(2). 31.5. Now, even if Explanation I to Sec.30(2) is not there in the statute, as long as the CoC functions as the statutory trustee for the operational creditors, its duty to be fair and equitable cannot be forsaken. If viewed differently, where will the impetus for the operational creditors be to initiate an insolvency proceeding against the corporate debtor under Sec.9 if they are not assured of a fair and equitable treatment? Neither logic, nor life's experience will ever support this proposition. 32. This now necessitates that the plan approved by the CoC should be (a) based on complete disclosure of information; (b) that its treatment of the interest of the operational creditor must be just, fair and equitable; and (c) that its allocation for the operational creditors is not less than that which the operational creditors might have obtained in a liquidation proceedings of the corporate debtor. 33. It could be now derived that any resolution plan, even though approved by the Adjudicating Authority yet if it does not satisfy th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anger called the CST. (ii) Duty of the Suspended Board of the CD 36. The first aspect which now concerns the court is the duty of the suspended board of the corporate debtor. When an IRP is appointed, he replaces the Board of the corporate debtor, but under Sec.19, the suspended Board of the corporate debtor is still under a statutory obligation to assist and cooperate with the IRP. Contextually, the expression to 'extend all assistance and cooperation' does not and cannot imply coffee with the IRP, but a subtle way of communicating the legislative intent that the suspended Board shall share all the information which will be useful for the IRP to prepare its assets and liability statement of the corporate debtor. To state it differently, Sec.19 casts a duty to make full and complete disclosure of all the assets and liabilities of the corporate debtor by its suspended Board. Evidently, the Parliament's choice of expression is not happy, but if the expressions that it has used is not interpreted as above, then it would inflict injury on the rights of the creditors and that will derail the objectives of the IBC from its intended course. (iii) Duty of the IRP & the RP 37. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his own reading of the previous financial statements of the corporate debtor, and also the claims preferred pursuant to the public notice issued by the Adjudicating Authority under Sec.13 read with Sec.15. It may be stated here that merely because a public notice is issued about the admission of an insolvency proceeding against a corporate debtor in couple of newspapers, it cannot be presumed that every creditor, be it operational or financial, will readily read it. And to re-emphasise, the working of the IBC should not ignore or overlook the fact a claim to money of the creditors is their Constitutionally protected right to property under Art.300A, and hence it cannot be destroyed merely because the creditors have not preferred any claims pursuant to public notice. Seen in the context, a public notice is only a mode for collecting information to aid in the preparation of the data base of the creditors of a corporate debtor, and not the only mode. 41.2. For instance is it difficult for an IRP or a RP to enquire whether the building where the corporate debtor functions or has its factory unit is a rented premises or owned by it, and if it is rented premises whether there are renta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the resolution process, but it requires to be emphasized that every litigation can give the IRP or the RP some information about the assets and liabilities of the corporate debtor. It could now be derived that due diligence expected of the IRP or the RP makes it mandatory for them to take note of any pending litigations while preparing the statutory documents that they are required to prepare. And, it follows that, if they fail to collect those information, necessarily there is a failure on their part to act with due diligence. (To ensure that the IRP and the RP act with due diligence, it may be necessary to inform the Adjudicating Authority/the NCLT about the pending litigation, which in turn may ensure that the Information Memorandum is a complete document on the information required) (iv) Transparency As Fairness in action 42. The foregoing discussion significates that the duty to act fairly does not start with the CoC but it commences even when the IRP or the RP prepare their statement or the Information Memorandum, as the case may be. The level of comfort an operational creditor may obtain in his journey through the resolution process is directly proportionate to the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of the CoC, still it is required to exercise a jurisdiction, akin to a revisional jurisdiction, to ascertain the correctness of what has been done before and by the CoC. And, this may have to be appreciated in the backdrop of the Constitutional need to constitute the Adjudicating Authority as a neutral tribunal to save IBC from facing embarrassing moments in view of the law declared in the Madras bar Association case. Set on this plane and based on the discussion hereinabove made, it could be now derived that the Adjudicating Authority may refuse to give his approval to a resolution plan as approved by the CoC in the following circumstances: a) if the information which forms the basis for the CoC for according its assent to a resolution plan is incomplete and exhibits lack of due diligence on the part of the RP to collect and collate information. This includes failure of the suspended Board of the Corporate debtor to make full disclosure of its affairs, which the IRP or the RP could have discovered with due diligence; b) where there is lack of transparency vis-a vis the correctness of the information to the knowledge of the operational creditors; c) where the CoC does not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) If after a successful resolution process, a third party-resolution applicant takes over the corporate debtor, then CST will apply to extinguish the rights of the undisclosed creditors but only against the successful resolution applicant or its successors-in-interest, and not against the promoters or the suspended board of directors of the corporate debtor. It should not be forgotten that CST is a judicial coinage to protect the third party-successful resolution-applicant from the uncertainties of future claims, and not invented to protect the fraud and suppression of the suspended board of the corporate debtor. 49.3 In all the cases, where the undisclosed creditors' rights are kept alive against the erstwhile promoters or board of directors of the corporate debtor, as indicated in paragraph 49.2(b) above, the following aspects go with it as a backup measure to ensure its working: a) The immediate consequence is that each of the promoters or the directors in the suspended board of the corporate debtor shall be personally liable, jointly and severally, to the undisclosed creditors - both financial and operational, and they can be proceeded against both for civil and crim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and if the only financial creditor had shared this concern and had chosen not to liquidate the MSME, then it could have easily invoked the SARFAESI Act, more particularly Sec.13(4)(b) and could have taken over the management of the MSME. This would have ensured that not only the MSME is saved, but the interests of the operational creditors are also preserved intact. This must also be appreciated in the context of the nature of solution that had eventually developed in the resolution plan offered and accepted: The MSME petitioner offered to sell its non-core assets for paying off its debts to its only financial creditor. This still could have been achieved without a CIRP under the IBC regime, as it only required that the MSME petitioner and its only financial creditor shared due consensus. But the charm and the temptation in invoking the IBC is that, unlike the regime it has created, SARFAESI does not have a clean slate theory inbuilt in its statutory scheme nor has the advantage of any judicial pronouncements to bring it out, with the result the MSME debtor will still be under an obligation to pay the liability to all its other creditors. ➢ Why should the financial credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of healthy companies are actually on the rise. The percentage of hair cuts have increased to such an extent that in some cases, they appear as close shave. Therefore, it will be worthwhile to have a thorough study conducted at the earliest so that there is a timely cure. Otherwise, we may land up in a situation where IBC itself may need a resolution plan." Shri. Anant Merathia's book titled "Defaulter's Paradise Lost" also makes a poignant reading on the functioning of the IBC. 52.2 In the context of attempts to avoid the dues to TANGEDCO by the corporate debtor, it is relevant to refer to the following passage from judgement of the Supreme Court in K.C. Ninan Vs Kerala State Electricity Board and Ors., 2023 SCC Online SC 663 (a case not on IBC). Speaking for the bench, the Hon'ble Chief Justice has observed: "117....the failure or inability to recover outstanding electricity dues would negatively impact the functioning of the public utilities and licencees.... In the larger public interest, conditions are incorporated in subordinate legislation whereby Electric Utilities can recoup electricity arrears. Recoupment of electricity arrears is necessary to provide fundi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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