Indian Bank (Appellant) Vs Charu Desai (NCLAT)
Commercial wisdom of Committee of Creditors (CoC) for amount to be paid to different classes or subclasses of creditors in accordance with provisions of the IB Code and the related Regulations.
Hon’ble National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi in Company Appeal No. 644 of 2021 & IA No. 2940 of 2021 & IA No. 193 of 2022, Indian Bank (Appellant) vs Charu Desai, Erstwhile Resolution Professional & Chairman of Monitoring Committee of GB Global Ltd. & Anr. dealt with following question of law;
Whether the allocation of the amount to Dissenting Financial Creditor is not in accordance with Section 30(2)(b) of the IB Code?
Hon’ble NCLAT held that, when the distribution is ultimately approved by e-voting by the CoC, the approved distribution value to each lender’s including the dissenting Financial Creditors, is taken by the CoC in its commercial wisdom, which cannot be interfered with by the Adjudicating Authority or by this Appellate Tribunal since it has not been placed before us that the approval of the Resolution Plan by the CoC and the Adjudicating Authority violates any statutory provision. Hon’ble NCLAT satisfied that the allocation to the Appellant, a dissenting Financial Creditor, is not in contravention of Section 30(2)(b) (ii) r/w Section 23. As noticed in M/s. Amit Metaliks Limited (supra), the Hon’ble Supreme Court has dismissed the Appeal by a dissenting Financial Creditor questioning the allocation to a dissenting Financial Creditor. Hon’ble NCLAT have noticed the law laid down by the Hon’ble Supreme Court where the Hon’ble Supreme Court has categorically held that what amount is to be paid to different classes or subclasses of creditors in accordance with the provisions of the Code and to a dissenting secured creditor is essentially the commercial wisdom of the CoC. Following law laid down by the Hon’ble Supreme Court, as noted above, we do not find any good ground to interfere with the order of the Adjudicating Authority approving the Resolution Plan. There is no merit in the Appeal. The Appeal is dismissed.
FULL TEXT OF THE NCLAT JUDGMENT/ORDER
1. This Appeal has been filed by Dissenting Financial Creditor challenging the order dated 05.2021 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Court No.-1, whereby the Adjudicating Authority approved the Resolution Plan submitted by the Resolution Applicant- ‘Dev Land & Housing Private Limited’ (Respondent No.2). The brief facts of the case and sequence of the events necessary to be noticed for deciding this Appeal are:-
Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor- ‘GB Global Limited’ (formerly Mandhana Industries Limited) was initiated by order dated 29.09.2017. Liquidation value on date of CIRP was found to be INR 307/08 Crores. On 30.11.2018, the Resolution Plan of one ‘Formation Textiles LLC’ (“FTL”) in respect of the Corporate Debtor was approved. FTL took over the management and control of the affairs of the Corporate Debtor on 31.01.2019. However, after running the affairs of the Corporate Debtor for several months, it could not implement the Resolution Plan. On 05.12.2019, the Adjudicating Authority passed an order directing handing over of possession of the Corporate Debtor to the Committee of Creditors (CoC) which in turn will be handed over to the Resolution Professional of the Corporate Debtor. On 08.01.2020, FTL handed over the possession of the Corporate Debtor to the CoC and the Respondent No.1. On 05.02.2020, the Adjudicating Authority allowed the Respondent No.1 to invite fresh Resolution Plans from Prospective Resolution Applicants. During 32nd CoC meeting held on 27.08.2020, CoC members unanimously agreed that a more recent valuation report should be obtained by the Resolution Professional and would be used for all purposes in connection with the CIRP of the Corporate Debtor. The Resolution Professional obtained a fresh valuation report as on 31.07.2020 which liquidation valuation came as INR 184.93 Crores. The Resolution Plan dated 10.09.2020 was received from the Respondent No.2. In the 38th CoC meeting held on 07.12.2020, discussion on the revised Resolution Plan was held and decided that final revised plan and distribution mechanism shall be put for the voting. Pursuant to the above Resolution Plan of Respondent No.2 was put to e-voting from 09.12.2022 to 31.12.2020 and was approved by 67.01% voting share of the CoC. The Appellant- Indian Bank having 11.11% voting share in the CoC had cast a dissenting vote on the Resolution Plan of Respondent No.2. Pursuant to the CoC’s approval, the Resolution Plan was placed before the Adjudicating Authority by the Resolution Professional by I.A No. 19 of 2021. On 04.01.2021, the Appellant raised certain queries regarding the plan value calculated by the Respondent No.1 in the 39th CoC meeting held on 01.01.2021. The Respondent No.1 by e-mail dated 08.01.2021 informed the Appellant that the value payable to the Dissenting Financial Creditors will be calculated on the assumption of the liquidation cost and the same will be in accordance to Section 53(1) of the Code. On 19.05.2021, the Adjudicating Authority approved the Resolution Plan. Aggrieved by the value assigned to the Appellant in the Resolution Plan, this Appeal has been filed. In the Appeal, following are reliefs sought:-
“a. That this Hon’ble Tribunal be pleased to consider the legality and validity of the impugned order dated 19th May, 2021 providing wrong Liquidation Value to the dissenting financial creditors;
b. That this Hon’ble Tribunal be pleased to declare that computation and disbursal of liquidation value to Appellant pursuant to the order dated 19th May, 2021 contrary to the provision of Section 30(2) of the Code;
c. Pending the hearing and final disposal of the present Appeal, the effect and implementation and execution of the impugned order dated 19th May 2021 passed by the Hon’ble Adjudicating Authority, Mumbai Bench in I.A. No. 19/2021 filed in the Company Petition 1399/2017 kindly be stayed;
d. Declare the second valuation of the Corporate Debtor as untenable in the eyes of law;
e. Any other just and equitable order in the interest of justice may kindly be ”
2. We have heard Shri Abhijeet Sinha, Learned Counsel for the Appellant, Ms. Pooja Mahajan, Learned Counsel for Respondent No.1, Shri Ramji Srinivasan, Learned Senior Counsel for Respondent No.2 and Shri Gopal Jain, Learned Senior Counsel for Respondent No.3.
3. Shri Abhijeet Sinha, Learned Counsel for the Appellant submits that there is no provision in the Code which empowers the Respondent 1 to carry out a fresh valuation process on the basis of which the fair value and liquidation value can be determined. It is submitted that in terms of the valuation of the Corporate Debtor as on 29.09.2017, liquidation value came to be INR 307.08 Crores and on 31.07.2020, the liquidation value of the Corporate Debtor was computed at INR 184.92 Crores, thereby liquidation value of the Corporate Debtor has been considerably reduced. The liquidation value attributable to the Appellant was reduced from INR 87.6 Crores to 50.51 Crores. The liquidation value is defined in the Code. The determination of fair value and liquidation value is provided under Regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and in pursuance of Regulation 35, the liquidation value was obtained as on 29.09.2017, there was no occasion for embarking upon fresh liquidation valuation which is not in accordance with law. It is further submitted that in the liquidation value assigned to the Appellant, the CIRP costs, liquidation cost and estimated liquidation costs have been illegally deducted which has further reduced liquidation value of the Appellant. The Appellant’s entitlement being a Dissenting Financial Creditor is as per Section 30(2) (b) (ii). The Appellant in the Resolution Plan has not been given the amount to which he was entitled by virtue of Section 30(2)(b)(ii). The Adjudicating Authority failed to appreciate that when Resolution Plan provides for priority payment of CIRP costs in full from the funds infused by Respondent No.2, then the liquidation value attributable to Dissenting Financial Creditor could not be arrived by deducting the CIRP costs once again from the liquidation value to be distributed to the Dissenting Financial Creditors. The Resolution Professional does not have any authority to alter the liquidation value as on Insolvency Commencement Date by reducing it further with the CIRP costs and liquidation cost. The distribution of the amount is neither fair nor equitable to the Dissenting Financial Creditors. The Dissenting Financial Creditors are entitled to liquidation value as arrived by valuers and shared to CoC in terms of Regulation 35 of CIRP Regulations, 2016.
4. Ms. Pooja Mahajan, Learned Counsel appearing for Respondent No.1 refuting the submission of Learned Counsel for the Appellant contends that there is no error in obtaining the fresh liquidation value consequent to CoC’s 32nd meeting held on 27.08.2020. The CoC deliberated the issue and unanimously resolved to obtain a more recent valuation report. The Appellant-Indian Bank was present in the 32nd CoC meeting and did not object to fresh valuation which was decided to be taken. In the 36th CoC meeting held on 20.10.2020, a query was raised on distribution to Dissenting Financial Creditors, to which Resolution Professional had clarified that in such an event, the lender would be entitled to their share of the net liquidation value which shall be arrived after providing adjustment for CIRP and estimated liquidation cost. The minutes of the said meeting were circulated but no objection or concerns were raised by the Appellant. The Resolution Plan fully complies with the provisions of Section 30(2)(b). In 39th CoC meeting held on 01.01.2021, revised plan value lender wise distribution was placed. The CoC had approved the Resolution Plan as well as the distribution of lenders of the amount proposed by the Resolution Applicant which was approved by 67.01% voting share. The Appellant cannot be allowed to question the commercial wisdom of the CoC which approved the plan with requisite voting percentage.
5. The submission of the Counsel for the Appellant that in the liquidation value as per Section 53 of the Code, there should be no deduction of the CIRP costs and estimated liquidation cost, is without any The aforesaid was clarified in the CoC meeting held on 07.12.2020 to which no objection was raised by the Appellant. It is a commercial wisdom of the CoC as to what amount is to be distributed to different category of lenders. The amount allocated to the Appellant under the plan is in conformity with provisions of Section 30(2)(b). The amount offered to the Appellant is not less than what he is entitled under Section 53 of the Code.
6. Objection regarding fresh valuation is agitated for the first time in this Appeal. There was rationale for second valuation since the earlier CIRP initiated on 09.2017 came to an end after approval of the Resolution Plan but due to non-implementation of the plan by FTL, the CIRP was again revived. The FTL ran the Corporate Debtor for almost a year. Due to the above fact, a more recent liquidation valuation was necessary for which CoC resolved. Even in the joint lender’s meeting held on 07.12.2020, the Appellant has stated that recovery available to lenders should not be less than estimated value of the liquidation value. Thus, the fresh valuation was fully agreed by all and Appellant cannot be heard in objecting the fresh valuation.
7. Shri Ramji Srinivasan, Learned Senior Counsel appearing for the Respondent No.2 submitted that the issue of conducting a fresh valuation of the Corporate Debtor was discussed and deliberated in the CoC meeting held on 27.08.2020 as well as on 34th CoC meeting held on 22.09.2020. In 36th CoC meeting held on 20.10.2020, Resolution Professional provided lender wise indicative distribution of the proceeds in case of liquidation and mentioned that net liquidation value shall be arrived at after providing adjustment of for CIRP costs and liquidation cost. The CoC having approved the Resolution Plan with requisite majority vote, Appellant cannot be allowed to question the Resolution Plan or the commercial wisdom of the CoC. The amount payable to the Dissenting Financial Creditors is more of an issue of distribution which is determined by the CoC in exercise of its commercial wisdom. Distribution mechanism having been approved by the requisite majority of the CoC that cannot be allowed to be questioned by the Appellant.
8. Shri Gopal Jain, Learned Senior Counsel appearing for Respondent No.3 submits that the Appellant having unequivocally agreed to conduct a fresh valuation and to the liquidation value, it cannot be heard in objecting the fresh valuation obtained as on 31.07.2020. The issue of distribution mechanism was discussed in 36th CoC meeting and the meetings of the joint lenders committee. During the CoC meeting, there is no objection of any kind raised by the Appellant. It is for the first time by e-mail dated 04.01.2021, the Appellant raised concern before the Resolution Professional in relation to value payable to it. Fresh valuation was conducted to enable revival of the Corporate Debtor. The Dissenting Financial Creditor is only entitled to liquidation value minus CIRP costs and estimated liquidation costs. In any case, on monetary terms, Appellant is making the highest recovery under the Resolution Plan.
9. We have considered the submissions of the parties and perused the
10. From the submission of the counsel for the parties and materials on record, following are the questions which arise for consideration in this Appeal:
(i) Whether the decision of the CoC taken in 32nd CoC meeting held on 27.08.2020 to obtain a more recent valuation report and reliance on such valuation report as on 31.07.2020 is contrary to the provisions of the Code and Regulations framed thereunder?
(ii) Whether the liquidation value ascribed by Resolution Professional and CoC to the Appellant as per Section 53 of the Code violates any provisions of the Code or Regulations?
(iii) Whether the allocation of the amount to the Appellant, a Dissenting Financial Creditor is not in accordance with Section 30(2)(b) of the Code?
11. The questions which have arisen in the present Appeal being interconnected are taken together.
12. Regulation 35 of the CIRP Regulations, 2016 provides for ‘fair value and liquidation value’. Regulation 35 is as follows:-
“35. Fair value and Liquidation value.
(1) Fair value and liquidation value shall be determined in the following manner:-
(a) the two registered valuers appointed under regulation 27 shall submit to the resolution professional an estimate of the fair value and of the liquidation value computed in accordance with internationally accepted valuation standards, after physical verification of the inventory and fixed assets of the corporate debtor;
(b) if in the opinion of the resolution professional, the two estimates of a value are significantly different, he may appoint another registered valuer who shall submit an estimate of the value computed in the same manner; and
(c) the average of the two closest estimates of a value shall be considered the fair value or the liquidation value, as the case may be.
(2) After the receipt of resolution plans in accordance with the Code and these regulations, the resolution professional shall provide the fair value and the liquidation value to every member of the committee in electronic form, on receiving an undertaking from the member to the effect that such member shall maintain confidentiality of the fair value and the liquidation value and shall not use such values to cause an undue gain or undue loss to itself or any other person and comply with the requirements under sub-section
(2) of section 29:
(3) The resolution professional and registered valuers shall maintain confidentiality of the fair value and the liquidation value.”
13. On initiation of the CIRP on 29.09.2017, the liquidation value was obtained as per Regulation 35 estimated INR 307.08 Crores as on 29.09.2017. The second valuation report was obtained as on 31.07.2020 which has given the liquidation value INR 184.93 Crores. The emphatic attack by Learned Counsel for the Appellant is on the second valuation exercise. It is submitted that the liquidation value is on the date of initiation of CIRP and there can be no liquidation value in between. The facts of the present case, as noticed above, indicate that CIRP which commenced on 29.09.2017 came to an end by approval of the Resolution Plan by FTL on 30.11.2018, after that FTL had took over the management and control of the affairs of the Corporate Debtor and it ran the Corporate Debtor for almost a year. The Resolution Plan could not be implemented by FTL and the Adjudicating Authority by an order dated 05.12.2019 directed the FTL to hand over the possession of the Corporate Debtor to the CoC and the Resolution Professional which ultimately was handed over on 08.01.2020. The present is a case where the CIRP which was initiated on 29.09.2017, a Resolution Plan came to be approved and after approving of the Resolution Plan under Section 31(3), the Moratorium came to an end and Resolution Professional to forward all records relating to conduct of CIRP and the plan to Board. It was due to failure of the implementation of the Resolution Plan, the Adjudicating Authority directed the Resolution Applicant to handover back the possession to the CoC and then the Adjudicating Authority directed to invite fresh Resolution Plans from Prospective Resolution Applicants. In the above circumstances, in 32nd CoC meeting held on 27.08.2020 considered above inviting fresh valuation. It is useful to notice the relevant discussion.
14. In the 35th meeting of the CoC held on 07.10.2020, the fresh valuation report as on 31.07.2020 was noticed and following was recorded in Agenda Item No.6:-
“Agenda item No.6
To take note of the Fair Value and Liquidation Value of the Corporate Debtor complied by the appointed valuers:
As was unanimously decided, after a detailed discussion and deliberation, by the members of the CoC in the 32nd CoC meeting, a more recent valuation report as obtained by the RP from the registered valuers would be used and referred to for all purposes in connection with the corporate insolvency resolution process of the Corporate Debtor as the same shall be more representative of the current fair and liquidation value of the Corporate Debtor.
RP team informed the forum that pursuant to the receipt of confidentiality undertakings from CoC members, recent valuation reports received from the valuers have already been emailed to the members alongwith summary of fair value and liquidation value of the Corporate Debtor as on 31st July 2020. The summary is given below:
