CoC-Approved Resolution Plan Binding on Government Creditors: NCLT Mumbai

Bank of Baroda Vs RSAL Steel Private Limited (NCLT Mumbai)

Summary: The NCLT Mumbai considered three interlocutory applications arising from the corporate insolvency resolution process of RSAL Steel Private Limited, initiated on 3 September 2019 following an application by Bank of Baroda. In the first application, Resolution Professional Rajender Kumar Girdhar sought approval of the resolution plan submitted by L. G. Balakrishnan and Bros Limited, which received 100% voting support from the Committee of Creditors. The Tribunal examined the resolution process, valuation, distribution to creditors, eligibility and statutory compliance under the Insolvency and Bankruptcy Code, 2016. Although the resolution amount was below the liquidation value, the Tribunal applied the Supreme Court’s ruling in Maharashtra Seamless Limited and held that a resolution plan need not match liquidation value. Relying also on K. Sashidhar and Committee of Creditors of Essar Steel India Limited, it recognised the limited scope of judicial review over the commercial wisdom of the CoC. The resolution plan was approved, with binding effect on creditors, government authorities and other stakeholders, and claims outside the approved plan were treated in accordance with Ghanshyam Mishra and Sons Private Limited.

In the second application, a property claimant sought admission of ₹2,23,50,000 as CIRP costs for compensation relating to disputed land, workers’ quarters and other charges. The Tribunal found that ownership and entitlement remained disputed and required determination by a competent forum. It further held that possession could not be demanded during the Section 14 moratorium, and that the belated claim could not be admitted after CoC approval of the resolution plan. IA No. 5097 of 2023 was dismissed.

In the third application, the Resolution Professional challenged the Income Tax Department’s adjustment of ₹61,06,790 in refunds for assessment years 2021-22 and 2022-23 against an earlier tax demand during the moratorium. The Tribunal held that such set-off constituted impermissible recovery and preferential treatment, reducing funds available for other creditors. IA No. 3933 of 2023 was allowed, and the Department was directed to release the adjusted refunds to the Corporate Debtor.

Cases Discussed

• Ghanashyam Mishra and Sons Private Ltd. Vs Edelweiss Asset Reconstruction Company Ltd. (Supreme Court of India), Civil Appeal No. 8129 of 2019, decided on 13.04.2021 — Relied upon for extinguishment of claims not forming part of the approved resolution plan.
• Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, (2020) 8 SCC 531 (Supreme Court) — Relied upon for the limited judicial review of CoC commercial wisdom and the prohibition on modifying a compliant resolution plan.
• Maharashtra Seamless Limited v. Padmanabham Venkatesh and Others (Supreme Court) — Relied upon for the proposition that a resolution plan need not match the liquidation value of the corporate debtor.
• K. Sashidhar v. Indian Overseas Bank and Others, Civil Appeal No. 10673 of 2018, decided on 05.02.2019 (Supreme Court) — Relied upon to define the limited scrutiny of resolution plans under Sections 30(2) and 31 of the Code.
• Interim Resolution Professional v. ICICI Bank, (2018 SSC Online NCLT 21931), as cited in the supplied order — Cited for restoration of amounts debited during moratorium.
• State Bank of India v. Debashish Nanda, Company Appeal (AT) (Insolvency) No. 49/2018, order dated 21.03.2018 (NCLAT) — Cited for prohibiting bank debits during moratorium.

FULL TEXT OF THE NCLT JUDGMENT/ORDER

1. The present Interlocutory Application is filed by Mr. Rajender Kumar Girdhar, the Resolution Professional of RSAL Steel Private Limited seeking approval of the Resolution Plan submitted by the L. G. Balakrishnan and Bros Limited under Section 30(6) of the Insolvency and Bankruptcy Code, 2016 (‘the Code’) read with Regulation 39(4) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulation (“the CIRP Regulations”). The Resolution Plan was duly approved by 100% of the Committee of Creditors (CoC) in its 16th CoC meeting held on 07.05.2021.

2. The Applicant submits that Bank of Baroda (Erstwhile Dena Bank) the Financial Creditor initiated the Corporate Insolvency Resolution Process (‘CIRP’) against RSAL Steel Private Limited (hereinafter called ‘the Corporate Debtor’) under Section 7 of the Code. This Tribunal vide order dated 03.09.2019 initiated CIRP against the Corporate Debtor and Mr. Rajender Kumar Girdhar was appointed as Interim Resolution Professionalst (‘IRP’). The 1 meeting of CoC held on 09.12.2019 unanimously resolved and confirmed the appointment of the Applicant as Resolution Professional (‘RP’) for the Corporate Debtor.

3. The Applicant appointed registered valuers: Mr. Rajubhai Kantilal Patel and Mr. Dilip Kumar Jain for Plant and Machinery; Mr. Rajubhai Kantilal Patel and Mr. Lalit Kale for Land & Building; and Mr.Shah Jigar Pradipchandra and Mr. Dilip Kumar Jain for Securities and Financial Assets.

4. In the 3rd CoC meeting held on 05.02.2020, the Applicant informed that invitation for expression of interest (EoI) in Form G was published on 23.11.2019 in newspapers namely Free Press Journal, English language and Navshakti, Regional Language (Mumbai Edition) and Economic Times English Language and Navbharat, Regional Language (Indore Edition) for inviting EoI from interested and eligible Prospective Resolution Applicants (‘PRAs’) wherein the last date for submission of EoI was specified as 09.12.2019.

5. The Applicant had received three Expression of Interest till 09.12.2019. The provisional list of PRAs was circulated to the CoC Members and PRAs on 19.12.2019 and objections were invited. Out of the three EOIs received, two were declared as eligible PRAs and final list of PRAs was issued on 03.01.2020. The Request For Resolution Plan (RFRP) and Evolution Matrix (EM) were duly approved by the CoC and issued to PRAs on 24.12.2019. The last date for submission of Resolution Plan was 23.01.2020. At the request of the PRAs and as approved by the CoC, the last date for submission of Resolution Plan was extended to 06.02.2020. And again to 12.02.2020 and again to 27.03.2020.th

6. The CoC, in its 8 meeting, resolved to terminate/cancel the present process for submission, evaluation and selection of Resolution Plan and decided to invite EoI afresh. Accordingly, fresh Form G was published on 17.09.2020 in Newspapers namely Free Press Journal, English Language and Navshakti, Regional Language(Mumbai Edition) and Free Press Journal, English Language and Samachar, Regional Language (Indore Edition) and the last date for submission of EoI was on 03.10.2020. In response to the EoI, the Applicant received three EoIs.th

7. The RFRP and EM were duly approved by the CoC at its 9 meeting with 100% voting share and stipulated 11.11.2020 as the last date for submission of Resolution Plan. The provisional list of PRA was issued on 07.10.2020 and final list of PRA was issued on 22.10.2020. At the request of one of the PRAs (L. G. Balakrishnan and Bros Limited) and as approved by CoC, the last date for submission of Resolution Plan was extended till 26.11.2020 and the same was informed to all the three PRAs.

8. The Resolution Plans submitted by all the three PRAs were unsealed in the 10th CoC meeting held on 02.12.2020 and it was found that the said Resolution Plans were not in compliance with provisions of the Code, Regulations and provisions of RFRP. Accordingly, the Applicant vide his emails dated 16.12.2020 and 20.12.2020 shared the observations/shortcomings with the Resolutions Applicants (RAs) and requested them to cure the defect by 23.12.2020 which was extended further till 30.12.2020. The last date for curing the defects was extended by the CoC till 12.01.2021.

9. The Applicant informed the CoC meeting held on 05.01.2021 that the Resolution Plan submitted by MCM Pacific Pte Limited and Sterling Structural Limited are not in conformity with the Code and RFRP, but the Resolution Plan submitted by L. G. Balakrishnan and Bros Limited was not in conformity with RFRP. Hence, further time was granted all the RAs to cure the defects till 21.01.2021. Again, it was observed that the Resolution Plans as revised by the RAs were not in conformity with the Code and RFRP and CoC extended further time to cure the defects by 12.02.2021. After discussions, time was again extended till 25.02.2021 for curing the defects.

10. The revised Resolution Plan received from all the three RAs had been shared with CoC and as per the legal opinion, it was found that only the Resolution Plan submitted by L. G. Balakrishnan and Bros Limited was found to be in conformity with the Code, Regulations and RFRP. Further opportunity was again granted to the other RAs to cure the defects and submit the addendum by 10.03.202. Thereafter, MCM Pacific Pte Limited submitted the revised Resolution Plan dated 10.03.2021 and L. G. Balakrishnan and Bros Limited submitted its letter dated 09.03.2021 in reply to the suggestion given by CoC. No revised Resolution Plan was submitted by Sterling Structural Limited. Further opportunities were again given to all the three RAs to cure the defect and submit revised Resolution Plans.

11. Finally, the CoC at its meeting held on 30.04.2021 discussed the Resolution Plan submitted by L. G. Balakrishnan and Bros Limited dated 25.11.2020 as last revised dated 29.03.2021 and the Resolution Plan submitted by MCM Pacific Ptc Limited dated 25.11.2020 as last revised dated 27.03.2020 and were put to vote through electronic voting system.

12. The Resolution Plan submitted by Resolution Applicant L. G. Balakrishnan and Bros Limited was approved by the CoC with 100% voting share and the Resolution Plan of MCM Pacific Pte Limited received 78.55% voting share. Therefore, the Resolution Plan submitted by L. G. Balakrishnan and Bros Limited was declared as selected Resolution Plan.

13. Brief background of the Corporate Debtor:

The Corporate Debtor is engaged in the business of manufacturing of Cold Rolled Close Annealed Steel Coils/sheets, semi-processed electrical steel/coils and value-added flat steel products. The factors leading to the distress of the Corporate Debtor as analyzed by the selected Resolution Applicant was inability to compete with bigger companies and its inadequacy in its sales force to bring in opportunities to sell to various clients.

14. Brief background of the Resolution Applicant:

a. The Resolution Applicant is engaged in the business of manufacturing chain, sprockets and metal formed parts for automotive applications. The Resolution Applicant also offers metal forming products for internal use as well as for other chain manufacturing plants, spring steel suppliers and umbrella manufacturers.

b. The Resolution Applicant is confident that the Resolution Plan would offer a mutually beneficial business partnership and the Resolution Applicant’s experience would facilitate revival of the Corporate Debtor.

15. Salient features of the approved Resolution Plan:

a. The Resolution Applicant proposes to acquire all the business and assets of the Corporate Debtor on a going concern basis on payment of Rs. 24 crores as provided here under:

• In the event that the actual CIRP costs are higher, the upfront cash payment to Financial Creditors shall be reduced, but the total financial outlay shall remain unchanged.
• The said Rs. 24 crores shall be brought in by the Resolution Applicant within 30 days from the date of approval of Resolution Plan by NCLT.

b. The Resolution Applicant will use its own funds from internal accruals to make the payments under the Resolution Plan. In this regard, the Resolution Applicant has provided its net worth certificate and an undertaking that the consideration to be paid under the Resolution plan shall be earmarked in a separate fixed deposit account.

c. The Resolution Applicant also proposes to infuse Rs. 10 Lakhs as equity capital in the Company for the subscription to 1,00,000 newly issued equity shares of face value of Rs. 10/- each. All the equity shares and all redeemable preference shares held by the erstwhile shareholders of the Corporate Debtor would stand extinguished by way of reduction in capital of the Corporate Debtor and consequently, the entire share capital of the Corporate Debtor shall stand cancelled without any payment to the shareholders of the Corporate Debtor holding such equity shares without the requirement of writing the words “and reduced” in the Corporate name and style of the Corporate Debtor. Upon approval of the Resolution Plan, it shall be deemed that the NCLT has also granted the necessary approval for reduction of share capital as required under the Companies Act, 2013 including Section 66 of the Companies Act, 2013 without the requirement of any further approval, act or action. The cancellation shall not require the consent of any of the creditors, or shareholders of the Corporate Debtor and the Resolution Plan as approved by the NCLT shall be binding on the Corporate Debtor and its various stakeholders.

d. Management Control of Business:

The Resolution Applicant proposes to form the monitoring agency consisting of three persons from the Resolution Applicant (as specified in the Resolution Plan), two nominees from the Financial Creditors and the Resolution Professional for overseeing/supervising the implementation of the approved Resolution Plan in terms of provisions of Section 30(2)(d) of the Code read with Regulation 38(2)(c) of the CIRP Regulations.

e. Liability of third parties/guarantors:

The guarantors or third party security providers shall continue to be liable to the Financial Creditors for the unpaid debt under their guarantees. The Financial Creditors shall have all rights and benefits available to them to enforce such guarantees or third party security provided by persons at their sole discretion, at any time in future to recover and realize the unpaid debt.

f. Implementation of the Resolution Plan:

All payments as outlined in the Resolution Plan shall be made within a period of 30 days from the date of approval by NCLT. Further, within 10 days from the date of approval by NCLT, the Resolution Applicant shall infuse Rs. 500 Lakhs into the Corporate Debtor as initial working capital margin. Thus the term of the implementation of the Resolution Plan shall be 40 days from the date of approval by NCLT.

g. Recoveries from Preferential/Fraudulent Transaction:

No petition under Section 43, 46, 50 and 66 has either been filed or pending before the NCLT.

h. Performance Security:

In accordance with regulation 36B (4A) of the CIRP Regulations and as required by item V(I) of the RFRP, the Resolution Applicant has provided performance security by way of bank guarantee dated 11.05.2021 issued by ICICI Bank for a sum of Rs. 2 crores and the same shall be valid till the term of the Resolution Plan.

i. Eligibility under section 29A of the Code:

The Resolution Applicant has submitted an affidavit dated 28.12.2020 confirming the eligibility under Section 29A of the Code to submit the Resolution Plan.

j. Employees and Workmen:

The existing employees and workmen of the Corporate Debtor will continue to be employees and workmen of the Corporate Debtor, under the control of the newly constituted Board of Directors.

16. The Applicant further submits that the Resolution Plan submitted is in compliance with Section 30(2) of the Code and Regulation 38(A) of the CIRP Regulations. The Applicant has confirmed the compliance of various provisions as contained in Form H dated 12.05.2021 as mandated under the code for seeking approval of the Resolution Plan from this Tribunal. The period of CIRP has been extended from time to time by the Tribunal upto 16.05.2021. The present Interlocutory Application has been filed on 12.05.2021, i.e. before the expiry of the period of CIRP.

Observations of the Adjudicating Authority:

17. We have heard the Applicant and perused the Resolution Plan and related documents submitted along with the Application.

18. As per the records, the liquidation value of the Corporate Debtor is about Rs. 29.13 crores and the fair value is Rs. 42.59 crores. The Resolution Plan provides for upfront cash infusion of Rs. 2270.42 lakhs to Financial Creditors and Rs. 129.58 Lakhs to Operational Creditors. Thus, there is a recovery of 6.99% dues to secured Financial Creditors and 64.29% dues of Operational Creditors. There are no claims from the employees/workmen or other creditors. It is observed that the Resolution amount under the Resolution Plan is lower than the liquidation value of the Corporate Debtor. In this connection, it is observed that the Hon’ble Supreme Court in the matter of Maharashtra Seamless Limited vs. Padmanabham Venkatesh and Ors. held that there is no requirement that the Resolution plan should match the maximized asset value of the Corporate Debtor. It also observed that there is no provision in the Code or regulations under which the bid of any Resolution Applicant has to match liquidation value arrived at in the manner provided in Regulation 35 of the IBBI (Insolvency Resolution Process for Corporate person) Regulations, 2016 and the intent of conducting valuation is only to assist the CoC in decision making.

19. As referred to the above summary of the Resolution Plan, we are satisfied that all the requirements of Section 30(2) are fulfilled and no provision of law for the time being in force appears to have been contravened.

20. Section 30(4) of the Code reads as follows:

“(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty six percent of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in subsection (1) of Section 53, including the priority and value of the security interest of a secured creditor and such other requirement or may be specified by the Board.’

Regulation 39 (3B) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that where two or more Resolution Plans are put to vote simultaneously, the Resolution Plan, which receives the highest votes but not less than requisite votes, shall be considered as approved. In this case two Resolution Plans have been put to vote and the Resolution Plan submitted by L. G. Balakrishnan and Bros Limited received highest votes (100%) and hence this Resolution Plan is considered as approved by the CoC.

21. Section 30(6) of the Code enjoins the Resolution Professional to submit the Resolution Plan as approved by the CoC to the Adjudicating Authority. section 31 of the Code deals with the approval of the Resolution Plan by the Authority if it is satisfied that the Resolution Plan as approved by the CoC under section 30(4) meets the requirements provided under section 30(2) of the Code. Thus, it is the duty of the Adjudicating Authority to satisfy itself that the Resolution Plan as approved by the CoC meets the above requirements.

22. On perusal of the Resolution Plan, it is observed that the Resolution Plan provides for the following:

a. Payment of CIRP cost as specified under Section 30(2)(a) of the Code;

b. Payment of debts of Operational Creditors as specified under Section 30(2)(b) of the Code;

c. For the management of the affairs of the Corporate Debtor after approval of the Resolution Plan; and d. The implementation and supervision of the Resolution Plan by the RP and the CoC as specified under Section 30(2)(d) of the Code.

23. In K Sashidhar vs. Indian Overseas Bank and Ors. (Civil Appeal No. 10673/2018 decided on 05.02.2019) (2019) the Hon’ble Apex Court held that if the CoC had approved the Resolution Plan by the requisite percent of voting share, then as per section 30(6) of the Code, it is imperative for the Resolution Professional to submit the same to the adjudicating Authority. On receipt of such a proposal, the Adjudicating Authority is required to satisfy itself that the Resolution Plan, as approved by the CoC, meets the requirements specified in Section 30(2). The Hon’ble Apex Court further observed that the role of the NCLT is ‘no more and no less’. The Hon’ble Apex further held that the discretion of the Adjudicating Authority is circumscribed by Section 31 and is limited to scrutiny of the Resolution Plan ‘as approved’ by the requisite percent of voting share of financial creditors. Even in that enquiry the grounds on which the Adjudicating Authority can reject the Resolution Plan is in reference to matters specified in Section 30(2) when the Resolution Plan does not conform to the stated requirements. The legislature, consciously, has not provided any ground to challenge the commercial wisdom of the individual financial creditors or their collective decision before the Adjudicating Authority.

24. In CoC of SR Steel India Limited vs. Satish Kumar Gupta and Ors (2020) 8 SCC 531 the Hon’ble Apex Court clearly laid down that the Adjudicating Authority would not have power to modify the Resolution Plan which the CoC in their commercial wisdom has approved. In para 42, the Hon’ble Court observed as under:

‘Thus, it is clear that the limited judicial review available which can in no circumstances trespass upon a business decision of the majority of the Committee of Creditors, has to be within the four corners of section 30(2) of the Code, in so far as the Adjudicating Authority is concerned and section 32 read with section 61(3) of the Code, insofar as the Appellate Tribunal is concerned, the parameters of such review having been clearly laid down in K. Sashidhar (supra).’

25. In view of the discussions and the law thus settled, we are of the considered view that the instant Resolution Plan meets the requirements of Section 30(2) of the Code and the Regulations 37, 38, 38(1A) and 39(4) of the CIRP Regulations. The Resolution Plan is not in contravention of any of the provisions of Section 29A of the Code and is in accordance with law. We, therefore, allow the Application in the following terms:

ORDER

26. The Application IA No. 1240 of 2021 in CP(IB) 2985 of 2018 is allowed and the Resolution Plan submitted by L. G. Balakrishnan and Bros Limited is hereby approved. It shall become effective from this date and shall form part of this order. It shall be binding on the Corporate Debtor, its employees, members, creditors including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force is due, guarantors and other stakeholders involved in the Resolution Plan.

27. In terms of the judgment of Hon’ble Supreme Court in the matter of Ghanshyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited (Civil Appeal No. 8129 of 2019 decided on 13.04.2021) (2021) SC 212, on the date of the approval of the Resolution Plan by the Adjudicating Authority, all such claims which are not a part of the Resolution Plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim which are not a part of the Resolution Plan. Accordingly, no person including the Central Government, any State Government or any local authority, guarantors and other stakeholders, will be entitled to initiate or continue any proceedings in respect to a claim prior to CIRP which is not a part of the Resolution Plan.

28. All the past liabilities including levies/tax dues to any Government authorities which are not part of the Resolution Plan and pertaining to Corporate Insolvency Resolution Process period shall stand extinguished from the date of approval of the Resolution Plan.

29. The Monitoring Agency as proposed in Section XII of the Resolution Plan shall be constituted to supervise and implement the Resolution Plan.

30. In accordance with Section 32A of the Code, the liability of the Corporate Debtor for an offence committed prior to the commencement of the Corporate Insolvency Resolution Process shall cease, and the Corporate Debtor shall not be prosecuted for such an offence committed prior to the commencement of Corporate Insolvency Resolution Process from the date of this order.

31. All the equity shares and preference shares of the Corporate Debtor would stand extinguished by way of reduction in capital of the Company without any payment to the shareholders holding such shares without the requirement of writing the words ‘and reduced’. Such reduction of share capital shall not require any further approval, act or action as required under the Companies Act, 2013 including Section 66 of the Companies Act, 2013 and such cancellation shall not require the consent of any of the creditors or shareholders of the Corporate Debtor.

32. The approval of the Resolution Plan shall not be construed as waiver of any future statutory obligations and shall be dealt with by the appropriate Authorities in accordance with law. The Corporate Debtor may obtain necessary approval required under any law for the time being in force from the appropriate Authority within a period of one year from the date of approval of the Resolution Plan.

33. The guarantors and third-party security providers (not being the Corporate Debtor or the Resolution Applicant) shall continue to be liable to the Financial Creditors for the unpaid debt under their guarantees. However, such guarantors shall not be entitled to exercise any right of subrogation in respect of such amounts against the Corporate Debtor and/or the Resolution Applicant.

34. Other reliefs and concessions not covered in the aforesaid paragraphs including exemption from levy of stamp duty, fees and registration charges that may be applicable in relation to this Resolution Plan and its implementation are not granted.

35. The moratorium declared under Section 14 of the Code shall cease to have effect from this date.

36. The Applicant shall forward all records relating to the conduct of the CIRP and the Resolution Plan to the IBBI along with the copy of this order for information.

37. The Applicant shall forthwith send a certified copy of this order to the CoC and the Resolution Applicant respectively for necessary compliance.

FULL TEXT OF THE ORIGINAL JUDGMENT/ORDER — IA No. 5097 of 2023

1. The present application has been filed by the Applicant seeking direction from this Tribunal to the Resolution Professional (RP) to admit the claim of the Applicant amounting to Rs. 2,23,50,000/- (Rupees Two Crore Twenty-Three Lakh Fifty Thousand Only) arising out of non-payment of dues accrued during the moratorium period as Corporate Insolvency Process (CIRP) costs.

2. Facts leading to the present case are as follows:-

a) The Applicant is the title holder and owner of the diverted land bearing Survey No. 21/1 admeasuring 0.798 hectare and having a permanent residential structure of 108 workers’ quarters constructed thereon; along with land bearing Survey No. 30/1 admeasuring 1.065 hectare and having a factory shed constructed thereon; both situated in Village Sejwaya, Tehsil and District Dhar, Madhya Pradesh (hereinafter referred to as “Said Property”). The Said Property is purchased and owned by the Applicant since 2012 under the Sale Agreement dated 30.03.2011 and Sale Deed dated

b) Pending the registration of the Sale Deed, the Applicant granted written permission vide letter dated 15.05.2012 (Permission Letter) allowing the Corporate Debtor to use the permanent residential structure being the workers quarters constructed on a part of the Said Property on the conditions, inter alia that the Corporate Debtor will hand over vacant premises within 7 days from the date of demand notice without claiming any rights and compensation and that in case of failure to handover vacant possession, the Corporate Debtor shall be liable to pay compensation towards liquidated damages @ Rs. 1,50,000/- (Rupees One Lakh Fifty Thousand Only) per month from April, 2012 till vacating the said premises without demure.

c) The said Permission Letter had been acknowledged by the Corporate Debtor which is evident from the stamp and signature of the authorized signatory of the Corporate Debtor. The Corporate Debtor is utilizing the property being the workmen’s quarters till date on the basis of the said Permission Letter. The Corporate Debtor is bound by the terms and conditions of the said Permission Letter as agreed mutually between the parties.

d) On being cognizant of the proceedings under section 7 of the Insolvency and Bankruptcy Code, 2016, the Applicant issued two demand notices dated 06.09.2022 for land bearing survey no. 21/1 and land bearing survey no. 30/1 to the Resolution Professional of the Corporate Debtor thereby calling upon the RP to hand over vacant possession of the land within a period of 7 days from the receipt of the present Demand Notice, failing which the Applicant will be constrained to adopt legal remedies.

e) The Corporate Debtor failed to respond to the said demand notices and hence the Applicant filed an Interlocutory Application no. 3124 of 2022 praying that the Said Property to be excluded from the assets of the Corporate Debtor and to hand over vacant and peaceful possession to the Applicant.

f) Pursuant to the filing of the Application, this Tribunal vide its Order dated 08.09.2023 stated that the Said Property cannot be considered as an asset of the Corporate Debtor merely on account of the approval of the Resolution Plan. The said Order also recorded that the approval of the Resolution Plan will not affect the rights of the parties. The RP of the Corporate Debtor also conceded that Said Property is not being considered as an asset of the Corporate Debtor.

g) The Applicant on 04.10.2023, issued a demand notice to the Corporate Debtor calling upon them to pay an amount of Rs. 2,23,50,000/- (Rupees Two Crore Twenty-Three Lakh Fifty Thousand Only) as compensation due to the Applicant upto September, 2023 and to hand over vacant, peaceful possession of the property. The Corporate Debtor had violated the clauses 1,3,5 and 6 of the Permission Letter and hence the Corporate Debtor is under obligation to pay amounts towards diversion tax, water charges, electricity charges etc.

h) The Applicant did not receive any response to the said demand notice, in view of the above, the Applicant filed a claim with the RP of the Corporate Debtor, arising out of non-payment of dues for the usage of the property from 01.04.2012 till date in terms of the Permission Letter.

i) The Corporate Debtor replied to the demand notice dated 04.10.2023 on 18.10.2023 denying the demands of the Applicant considering that the workmen’s quarters standing on the land are part of the asset of the Corporate Debtor and formed part of the Resolution Plan.

j) The Corporate Debtor has sought approval of the Resolution Plan in complete, considering the property as an asset of the Corporate Debtor which is in contravention of the Order passed by the consent of the parties by this Tribunal dated 08.09.2023 and also wherein the RP had conceded to the fact that the Said Property is not an asset of the Corporate Debtor. The RP in its reply dated 18.10.2023, to the demand notice has made contradictory statements, as to on one hand stating that the property along with the structures standing thereon is not considered a part of the asset of the Corporate Debtor and on the other hand states that the Plant & Machinery installed on the Said Property is owned by the Corporate Debtor as the same was transferred in the name of the Corporate Debtor through Slump Sale Agreement dated 30.03.2011 and the same also appears in the books of accounts of the Corporate Debtor, hence made a part of the estate of the Corporate Debtor.

k) In response to the reply of the Corporate Debtor dated 18.10.2023, the Applicant addressed the letter to the RP of the Corporate Debtor stating that the RP has acted in contravention to the order passed by the Tribunal dated 08.09.2023 such that the properties and the structures standing thereon cannot be a part of the estate of the Corporate Debtor.

l) Further, as the Applicant in its reply dated 18.10.2023 have stated that in order to keep the Corporate Debtor as a going concern and in view of the moratorium imposed, the property and the structures standing thereon could not have been vacated by the Corporate Debtor. Hence in view of the said submission, the demand of Rs. 2,23,50,000/- up to September, 2023 and future payment at the rate of 1,50,000/- per month till the date of handing over the possession of the property is liable to be included in the CIRP costs of the Corporate Debtor.

m) Further, the Corporate Debtor has let out some quarters to third parties, Mr. Surendra Singh, Mr. Prabhat Singh and Mr. Ajit Singh on rent. The said persons who are residing on the property are not the employees of the Corporate Debtor and are residing without prior consent of the Applicant which is in violation of the permission letter.

n) Further, the RP vide email dated 20.10.2023 rejected the claim of the Applicant on the basis that the period for submission of the claim had expired and also an application for approval of the Resolution Plan was submitted to the Tribunal and was reserved on 08.09.2023. Pertinently the said order also recorded that the said property did not form part of the asset of the Corporate Debtor. Thus it was necessary to modify the Resolution Plan rather than seeking approval of the Resolution Plan.

o) The Applicant could have made a demand of the claim only upon the order passed on 08.09.2023 and hence it can neither be said that the ‘Claim Form’ is being filed at a belated stage nor that such a ‘demand’ cannot be made during the moratorium period of the Corporate Debtor.

p) Hence, the present Application is filed.

3. The Resolution Professional filed his reply dated 29.11.2023 denying the allegations and averments made in the Application. The RP states that:- a) The Applicant has sought reliefs pertaining to the property in the possession of the RP of the Corporate Debtor but has not made the RP as a party to the Application.

b) The RP states that the Applicant is claiming ownership of the land bearing Survey No. 21/1 with the workers’ quarters constructed thereon, and open land bearing Survey No. 30/1 situated at Village Sejwaya, Tehsil and District Dhar, Madhya Pradesh (Disputed Property) based on a Sale Agreement dated 30.03.2011 and Deed of Amendment dated 04.07.2020 entered into between Ruchi Strips and Alloys Limited (RSAL) and the Applicant.

c) Similar application had been filed by the Applicant being IA 3124 of 2022 thereby seeking clarification on ownership of the Disputed Property wherein, parties had agreed to keep their contentions open and agitate their case before the appropriate forum. In the said terms, the Tribunal had disposed-off IA 3124 of 2022 vide Order dated 08.09.2023.

d) Vide the present Application, the Applicant is attempting to take benefit of the ambiguity in the Order dated 08.09.2023, wherein it has been recorded that the counsels appearing for the Respondent herein, had submitted that both the land bearing Survey No. 21/1 and the workers’ quarters constructed thereon were not the property of the Corporate Debtor. However, it has always been the case of the Respondent herein that the workers’ quarters constructed on land bearing Survey No. 21/1 was in the ownership of the Corporate Debtor though the ownership of the land bearing Survey No. 21/1 was disputed. That the Respondent herein has stated the same in the Affidavit in Reply dated 12.10.2022 filed to IA 3124 of 2022.

e) The RP vide its Additional Affidavit dated 15.11.2022 has also brought on record additional documents pertaining to copies of the Balance Sheet of the Corporate Debtor as on 30.03.2011 and 31.03.2012, payment challan towards stamp duty list of Assets Head wise as on 30.03.2011 and 31.03.2012, which has made it clear that the Plant & Machinery installed on the Land bearing survey No. 30/1 and Staff Quarters constructed on land bearing survey No. 21/1 has been transferred in the name of the Corporate Debtor through Slump Sale Agreement dated 30.03.2011 and the same is appearing in the books of accounts of the Corporate Debtor and thus is made a part of the Estate of the Corporate Debtor.

f) Despite the Order passed by this Tribunal on 08.09.2023 in IA NO. 3124 of 2022, wherein it was kept open for the parties to approach the competent authority for ascertaining the ownership rights of the properties in question, the Applicant issued a Demand notice dated 04.10.2023 thereby calling upon the RP to pay an amount of Rs. 2,23,50,000/- as compensation for the use of the Disputed Property and also requested the Respondent Corporate Debtor to hand over the physical possession of the property.

g) The Respondent further apprised the Applicant that by virtue of Moratorium imposed on the Corporate Debtor, the Applicant cannot claim possession of the disputed property until the Moratorium ceases to have effect.

h) The possession of the property cannot be granted as the Applicant had voluntarily granted permission to the Corporate Debtor to occupy and use the land bearing Survey No. 21/1 and 30/1 vide Permission Letter dated 15.05.2012 on the basis of mutual understanding between the erstwhile management of the Corporate Debtor and the Applicant and till date the possession of the land is with the Corporate Debtor.

i) The staff quarters and the factory building, plant and machinery are being utilized to maintain the Corporate Debtor as a going concern.

j) Hence, it is submitted that the land bearing Survey No. 21/1 and 30/1 is not an asset of the Corporate Debtor and as such not dealt under the Resolution Plan. However, the staff quarters and the factory building, plant and machinery constructed/installed since 1992 is lawfully being owed by the Corporate Debtor and is included in the Resolution Plan. Further, seeking vacant possession of the land cannot be permitted at this stage as it would derail the CIRP of the Corporate Debtor.

k) Further, the compensation as claimed by the Applicant arises on the terms and conditions of the Permission Letter dated 15.05.2012 which clearly stipulates at para no. 6 that only upon failure of the Corporate Debtor to handover the possession of the property within 7 days of the demand made, the Corporate Debtor will be liable to pay the compensation and the liquidated damages. However, in view of the Moratorium, the Applicant cannot claim the disputed property and demand of the claim arises only after the possession.

l) Further, prayer to stay on the pronouncement of the Plan approval order shows the intention of the Applicant to derail the CIRP process. Hence, in view of the above the application is to be dismissed in limine with exemplary cost.

Analysis and Decision

4. We have heard the Counsels for the parties and perused the documents on record.

5. The Ld. Counsel for the Applicant has contended that the Said Property consisting of land together with the building constructed thereon was acquired under the Sale Agreement dated 30.03.2011 and Sale Deed dated 30.03.2012 and permission was granted to the Corporate Debtor only to use the permanent residential structure constructed on a portion of the Said Property as workers’ quarters, on the terms and conditions contained in the Permission Letter dated 15.05.2012. On the other hand, the Ld. Counsel for the Respondent has contended that the workers’ quarters constructed on land bearing Survey No. 21/1 was in the ownership of the Corporate Debtor though the ownership of the land bearing Survey No.21/1 was in dispute based on the Slump Sale Agreement dated 30.11.2011 executed in favour of the Corporate Debtor. It is pertinent to observe that Sale Agreement relied upon by the Applicant and the Slump Sale Agreement relied upon by the Respondent were executed on the same day by the parent company of the Corporate Debtor. On account of the dispute regarding ownership of the land bearing Survey No.21/1 and the workers’ quarters constructed thereon, the Applicant filed another Interim Application bearing No.3124 of 2024 seeking declaration that the Said Property be excluded from the assets of the Corporate Debtor. In the said IA No.3124 of 2022, the Counsel for the Respondent conceded that the Said Property is not being considered as an asset of the Corporate Debtor which is undergoing CIRP under the Code. However, this Authority has kept the question of title on the Said Property open and liberty was granted to the parties to approach civil court/authority/forum having jurisdiction over the matter for deciding the rights of the parties. It was also clarified that the approval of the Resolution Plan in the case of the Corporate Debtor would not affect the rights of the parties with respect to the Said Property. Thus, it is clear that the rights of the parties with respect to the Said Property are disputed and will be subject to outcome of civil litigation which may be initiated by the parties.

6. The present application has been filed by the Applicant for admission of a claim amounting to Rs.2,23,50,000/- towards compensation for violation of the terms of permission given to the Corporate Debtor and other charges towards diversion tax, electricity charges, water charges etc for usage of the Said Property which is under dispute. When the right of the parties relating to the Said Property has been kept open for determination by a court of competent jurisdiction, it would not be possible to determine the claim of the Applicant which is purely dependent upon the rights of the parties. Furthermore, the claim of the Applicant is in the nature of compensation/damages which cannot be determined by the RP.

7. Even otherwise, when the Corporate Debtor is in possession or occupation of the Said Property on the commencement of CIRP, the Respondent cannot demand possession by virtue of Section 14(d) of the Code. The definite contention of the Applicant is that it addressed two demand notices dated 06.09.2022 calling upon the Corporate Debtor to hand over vacant possession of the Said Property to the Applicant. Since the CIRP of Corporate Debtor has commenced on 03.09.2019, undisputedly the demand notices have been issued during the moratorium declared under Section 14 of the Code and hence the demand notices which trigger the obligation to pay compensation do not take effect. On this count also the claim made by the Applicant cannot be admitted.

8. It is also pertinent to observe that the Applicant is very well aware of the initiation of CIRP against the Corporate Debtor but filed a claim on 12.10.2023; that means at a belated stage when a Resolution Plan has already been approved by the CoC. It is a settled position of law that admission of claims after approval of Resolution Plan by the CoC would make the CIRP an endless process and liable to be dismissed unless sufficient reasons are made out. No such reasons or circumstances are made out in the present case to admit a belated claim.

9. Having regard to the above discussion, we are of the considered view that the claim of the Applicant cannot be admitted in the facts and circumstances of the case. Hence, IA No. 5097 of 2023 stands dismissed.

FULL TEXT OF THE ORIGINAL JUDGMENT/ORDER — IA No. 3933 of 2023

1. The present Interlocutory Application has been filed by the Resolution Professional (RP) of RSAL Steel Private Limited (in short ‘the Corporate Debtor’) under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (hereinafter ‘the Code’) read with Rule 11 of the National Company Law Tribunal Rules seeking directions against the Respondent, the office of the Assistant Commissioner of Income Tax to release the wrongly adjusted income tax refunds for assessment year 2021-2022 and assessment year 2022-23 aggregating Rs. 61,06,790/- against the demand made under Section 271(1)(c) for the assessment year 2013-14 during the moratorium period in breach of the provisions of the Code.

The brief facts leading to the filing of the present Application

2. Corporate Insolvency Resolution Process (CIRP) as per order of this Tribunal dated 03.09.2019 pursuant to the said order, Mr. Rajender Kumar Girdhar was appointed as Interim Resolution Professional and a moratorium under Section 14 of the Code was declared in respect of the Corporate Debtor. During the CIRP, the Applicant filed income tax return for AY 2021-22 on 12.03.2022 claiming an income tax refund of Rs. 17,61,070/-.

3. The Respondent vide its notice of Demand dated 29.03.2022 issued under Section 156 of the Income Tax Act made a demand of Rs. 11673230/- for AY 2013-2014. Though the Respondent was informed of the declaration of moratorium under Section 14 of the Code. The Respondent proceeded with issue of notice dated 06.09.2022 under Section 271(1) of the Income Tax Act. On further follow-up, the Respondent vide its communication dated 28.09.2022 assured that no demand would be reinforced until the end of the moratorium period.

4. The Applicant also filed ITR for AY 2022-2023 whereby claimed income tax refund of Rs. 57,66,240/-.

5. In spite of the assurance given by the Respondent vide communication dated 29.09.2022, the Respondent adjusted an amount of Rs. 61,06,790/- out of the income tax refund payable to the Corporate Debtor for the AY 2022-23 vide chalan Nos. 47291 and 48251, both dated 01.06.2023 and Chalan No. 39777 dated 21.04.2023.

6. Upon knowing about the adjustment, the Applicant raised a grievance on 21.06.2023 on Respondents portal which is yet to be resolved. Hence the present petition.

7. The Respondent has been served notice of the present application. Since there was no representation on behalf of the Respondent, this Tribunal vide its order dated 11.10.2023 set the Respondent ex-parte.

Analysis and decision

8. We have heard the counsel appearing for the Applicant and perused the Petition and the annexures.

9. The learned counsel for the Applicant submitted that the Respondent adjusted/set off an amount of Rs. 61,06,790/- during CIRP in violation of the moratorium declared vide order dated 03.09.2019 of this Tribunal. The adjustment of the said amount is a mode of recovery by the Respondent in violation of the moratorium and the Respondent is liable to return or pay the adjusted amount to the Corporate Debtor.

10. It is further submitted that a Resolution Plan has already been approved by the CoC with the requisite majority on 30.04.2021 and the Application for approval of the Resolution Plan is pending adjudication before this Tribunal.

11. In the above background, the limited point coming up for consideration is whether set-off can be exercised by the Respondent during the moratorium and if the Respondent is liable to refund /pay the amount of Rs. 61,06,790/- to the Corporate Debtor.

12. The moratorium under Section 14 of the Code, stays the commencement and continuation of all legal proceedings against the Corporate Debtor and also prevents any action to foreclose, recover or enforce any security interest created by the Corporate Debtor. This moratorium remains in place until the Tribunal confirms the Resolution Plan approved by the CoC or until the Tribunal passes a liquidation order requiring the assets of the Corporate Debtor to be gather and distributed among its creditors. It is a matter of record that moratorium under Section 14 of the Code was declared on 03.09.2019 upon admission of the Corporate Debtor into CIRP.

13. The moratorium under the Code is a protective feature to ensure that all the creditors work collectively to decide the future of the Corporate Debtor. Simultaneously, the Resolution Professional is empowered under Section 18 of the Code to take control and custody of any asset over which the Corporate Debtor has ownership rights. Thus, it is clear that the scheme of the Code is to explore resolution of the Corporate Debtor by collectively addressing all the creditors through the Resolution Plan.

14. The treatment of different class of creditors in the Resolution Plan and also in the liquidation process are dealt in detail in the Code. However, the Code has not permitted set-off during CIRP as it can operate as a preference. In the present case, the Respondent instead of making a claim before the Resolution Professional preferred to exercise a set-off by adjusting the tax refunds payable to the Corporate Debtor during the period of moratorium. This not only acted as a preferential payment to the Respondent, but also reduced the total funds available to the other creditors awaiting distribution as per the provisions of the Code.

15. The Hon’ble NCLAT held in a catena of judgements that the creditors cannot exercise set-off during the moratorium. In the case of Interim Resolution Professional v. ICICI Bank (2018 SSC Online NCLT 21931), ICICI Bank was ordered to deposit the money it had debited during moratorium back into the Corporate Debtors account. In another case, State Bank of India v. Debashish Nanda (Company Appeal (AT) (Insolvency) No. 49/2018, order dated 21.03.2018), the Hon’ble NCLAT prevented the Bank from debiting amounts during moratorium from the Corporate Debtor’s account.

16. In view of the discussions above, it can be seen that adjustment of refund amount during moratorium is against the spirit of the Code and also results in preferential payment to the Respondent. It is also observed that such set-offs are not permitted during moratorium as held by the Hon’ble NCLAT in various decisions.

17. Having regard to the above, we allow IA No. 3933/2023 and direct the Respondent to release the wrongly adjusted income tax refunds for assessment year 2021-22 and 2022-23 aggregating Rs. 61,06,790/- to the Corporate Debtor which will be appropriately dealt by the Committee of Creditors (CoC) in whatever way it thinks fit in its commercial wisdom.