Introduction:

It is, for the matter of reality, that there is no mandate under the I&B Code which provides that whether the Resolution Plan’s value shall be more than the liquidation value of the Corporate Debtor. It is this perplexing issue that the case of Orchid Pharma Insolvency deals with. The situation in the Orchid Pharma Insolvency case is also imperative from the I&B Code point of view as it consequently will throw light on the red flags which have remained unscrutinized. The other substantive practical problem which this case circles around is that can a resolution plan be rejected by the Court after its approval from the CoC. Secondly, can the Court slip into the uncharted territory of ‘commercial wisdom’ of CoC.

Factual Background:

  • NCLT:
    • Chennai Based Orchid Pharma was among the 28 Large Corporate Defaulter in the Reserve Bank of India’s Second List of debt laden companies that was referred in for insolvency in August 2017.
  • Order for initiating the Corporate Insolvency Process was passed against the debt laden Company by the Chennai bench on August 17, 2017.[1]
  • Ingen Capital (U.S based Co.) came out as the highest bidder at INR 1490 cr. Albeit, the resolution plan was squashed as Ingen Capital failed to make payment as per the provisions.
  • Thereby, initiating the Second round of Corporate Insolvency Resolution Process (CIRP), in which 3 companies competed in the race to bid for the Orchid Pharma The three companies were:

> Dhanuka Laboratories (Gurgaon-based)

> Accord Life Spec (Chennai-based)

> Covalent Laboratories (Hyderabad-based)

  • After the submission of applications, approval was given by the NCLT, vide Order dated June 25/27, 2019 to the plan submitted by Dhanuka Laboratories Limited (Passed by 67% vote of CoC)

Issue Involved:

  • Whether the approved Resolution Plan submitted by Dhanuka Laboratories Ltd. is viable and feasible or not?
  • Can a Resolution plan’s value be less than the Liquidation Value?

Decision:

  • NCLAT:
    • After the approval of Resolution plan submitted by Dhanuka Laboratories, an appeal was preferred by Accord Life Spec, which was one of the companies in race to acquire Orchid Pharma.
    • The NCLAT accepted the appeal and further vide its order Dated November 13, 2019, rejected the bid of Dhanuka Laboratories on account of it being lower than the liquidation value
Particulars Amount (in crores)
Total Debt 3200 (Approx.)
Dhanuka’s Laboratories offer 1116.04
Liquidation value 1309
  • Raison d’etre for the order delivered:

“…the basic feature of the I&B Code was that an ‘Operational Creditor’ cannot be paid anything less than the ‘Liquidation Value’ and the basic principle is the maximization of the assets of the ‘Corporate Debtor’, balancing all the stakeholders by maximization of their assets, no ‘Resolution Plan’ can offer any amount upfront or by other way, which is less than the ‘Liquidation Value’. It will be against the object of the Code as also the provisions of Section 30(2) of the I&B Code,”[2]

The relevant portion of S.30 has been re-capitulated below:

“30. Submission of resolution plan.—(1) A resolution applicant may submit a resolution plan along with an affidavit stating that he is eligible under section 29A to the resolution professional prepared on the basis of the information memorandum.

(2) The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan—

xxx xxx xxx

(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53;

Further Proceedings:

  • SUPREME COURT:
    • Supreme Court in its order dated December 6, 2019 provided for interim stay on NCLAT scrapping of Dhanuka’s resolution plan.
    • The order came after an appeal was filed by SBI, contending that Appellate Tribunal erred while overriding the commercial wisdom of CoC.

Conclusion:

The NCLAT has certainly made its position clear, with respect to the sum which a Resolution Plan should offer. However, this is not the final word on the issue as the Supreme Court is yet to consider this aspect. The appeal has left the question hanging in the air and it still remains to be seen whether the explanation given by the NCLAT will be upheld by the Supreme Court as and when it is called upon to decide the issue.

The main takeaway from this case would be the understanding of whether the Tribunals can transgress into the forte of decision making by the CoC and whether the acceptance of a Resolution Plan below the Liquidation Value is a procedural deviation or not? As long as these questions remain unanswered it will be interesting to see how the provision of the Code are ironed out and the confusion surrounding them reduced. Perhaps the Supreme Court will decide this matter once and for all in the future.

Timeline

[1] Lakshmi Villas Bank v. Orchid Pharma Ltd, CP/540/(IB)/CB/2017.

[2] Accord Life Spec Private Limited v. Orchid Pharma Limited & Ors. CA(AT)(Ins)No. 761 of 2019.

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