Adjudication and Appeals for Corporate Persons

Read the following carefully and answer the questions given at the end :

Pine Food Industries Limited (“PFIL”) is one of the top FMCG player and listed entity in India. It is a leading manufacturer and marketer of various edible oils, food products and eatables. Its Authorized Capital is Rs. 252.00 crore and Paid-up Capital is Rs.

65.00 crore. PFIL has borrowed from various Banks and Financial institutions in India and its borrowings were around Rs. 12,000 Crore.

Due to unprecedented crash in global prices of the oil seeds coupled with falling revenues in the oil business gave a crippling blow to PFIL.

AB Bank and BC Bank filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 (“Code”) for initiating the insolvency resolution process against PFIL (hereinafter called as the Corporate Debtor (“CD”)). After hearing both the parties, National Company Law Tribunal (“NCLT”) admitted the petition filed. The Financial Creditor proposed the name of Kapoor to act as Interim Resolution Professional (“IRP”).

An application was filed before NCLT by one of the creditors who made a claim before the Resolution Professional (“RP”) stating that the CD owed to pay USD 10.00 crore, based on the Bills of Exchanges, ordering the CD to pay this creditor for the goods supplied by another party. On making of such claim before the RP, it has been rejected by him saying that it is not a Financial Debt as it is an Operational Debt therefore, it could not be considered as Financial Debt as claimed by applicant therein.

Vijay Kumar Jain, suspended Director of the CD, filed an application before the NCLT under section 60(5) of the Code seeking an order for setting aside the decision taken by the Committee of Creditors (“CoC”) disallowing the erstwhile representatives of the Corporate Debtor including Vijay to participate in the CoC meetings; declare that the CoC meeting is non est; direct the RP to ensure active participation of the applicant in the meetings of CoC; provide all the documents and information to the applicant.

RP filed application in NCLT under section 43(1) of the Code for seeking reversal of the amounts that were debited from the current accounts of the CD maintained with XYZ Bank which had been debited by the XYZ Bank before the insolvency commencement date and were utilized against the payment of the dues owed by the CD to a Bank in relation to the Letter of Credit issued by them.

The RP submits that the payment of the impugned amount lead to preferential treatment towards XYZ Bank by the CD as such payment has the effect of putting Respondents (i.e. XYZ Bank) in a beneficial position than it would have been in liquidation of the CD in accordance with Section 53 of the Code. It is further stated by the RP that the payments of the impugned amount by the Corporate Debtor were not in the “ordinary course of business” of the CD.

NCLT, vide its order, held that the respondent Bank, which had debited an amount aggregating to Rs. 65.98 crores from the current accounts of the Corporate Debtor is directed to reverse the said amount within 30 days from the date of the said order.

Since the resolution plan is already submitted and under examination of the CoC without consideration of this amount, therefore the appropriation of this amount will be decided by the CoC. XYZ Bank filed appeal in NCLAT against the order of NCLT.

The main plea taken by the Appellant Bank is that the RP before filing an application under Section 43(1) of the Code formed no independent opinion nor afforded an opportunity to the Appellant to explain about the transactions in question.

The RP called for Expression of Interest (“EOI”). 28 prospective resolution applicants showed their interest out of which two prospective resolution applicants were rejected as one was disqualified under Section 29 A of the Code (being related party) and the other was a financial investor who did not meet the criteria in the EOI evaluation parameters.

The applicant reviewed the four Resolution Plans submitted by the Resolution Applicants and found that only the plans submitted by 2 Resolution Applicants (RA1 and RA2) provided for the corporate insolvency resolution of the Corporate Debtor as a whole and on a going concern basis.

The RP filed application under section 30(6) of the Code, seeking order for approval of the resolution plan for the Corporate Debtor submitted by the consortium led by PAL (RA2) as approved by the members of Committee of Creditors (CoC). The said resolution plan was approved by a vote share of 96.85%. RP filed application in NCLT for approval of Resolution Plan.

While the said application was pending for consideration before the NCLT, Hon’ble Supreme Court, in Vijay Kumar Jain Vs. Standard Chartered Bank & Ors pronounced the judgment. Under the Judgment of Hon’ble Supreme Court, the approval of the NCLT to the resolution plan of RA2 was interdicted. In compliance of the above-mentioned Hon'ble Supreme Court order, NCLT by its order directed as follows :

“Resolution Professional is directed to comply with the directions of the Hon’ble Supreme Court and submit the report within the stipulated time as provided by the Hon'ble Supreme Court.”

Thereafter, NCLT approved the Resolution Plan submitted by RA2 and passed orders and directions on the reliefs and concession sought.

Since in Para 38, NCLT in their order rejected some of the relief sought, RA2 moved to NCLT for modification of order of NCLT.

In the application filed, RA2 had sought substitution of Para 38 of the order of NCLT approving the Resolution Plan of RA2 as under :

Existing Para “38. Any relief sought for in the Resolution Plan, where the contract/agreement/ understanding/ proceedings/actions/notice etc is not specifically identified or is for future and contingent liability, is at this moment rejected.”

Proposed Para “All claims that were either not filed or not admitted during CIRP in terms of the provisions of the Insolvency and Bankruptcy Code, 2016 shall stand extinguished.

Further, claims admitted/ verified by the Resolution Professional shall stand settled and extinguished as per the Resolution Plan.”

Resolution Plan approved by NCLT of RA2 leads to a 60% haircut for the lenders.

RA2 completed its acquisition of PFIL.

Referring decided case and relevant provisions of the Insolvency and Bankruptcy Code (IBC), 2016 and Rules and Regulations made thereunder, answer the following questions :

COB Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiating a Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, M/s. Gupta Infra Private Limited (GIPL). The said application was admitted by the Adjudicating Authority (AA) during October, 2018 and a Resolution Professional (RP) was appointed as an Interim Resolution Professional (IRP).

Following is the financial position of GIPL as on the date of commencement of the CIRP :

Liabilities Amount in Assets Amount in ₹

₹ Crores Crores

Share Capital – Equity 100.00 Fixed Assets – Land and 115.00

Building

Share Capital – Redeemable 75.00 Fixed Assets – Plant and 165.00 Preference Shares Machinery Share Capital – Convertible 25.00 Other Fixed Assets 70.00 Preference Shares Debentures (Unsecured fully 50.00 Investments in Subsidiaries 50.00 convertible)

Long Term Borrowings – Fully 300.00 Inventories 150.00 Secured Short Term Borrowings – Unsecured 75.00 Receivables 110.00 Loan from Related Parties 25.00 Cash and Bank Balances 15.00 Payables 65.00 Other Current Assets 25.00 Provisions 35.00 Accumulated Losses 100.00 Deferred Tax Liabilities 15.00 Other Current Liabilities 35.00 Total Liabilities 800.00 Total Assets 800.00 Other Additional information provided by the Corporate Debtor :

[Amounts stated in the table above can be treated as claims made by each of the parties in their respective category].

Other Current Liabilities include :

₹ In Crores

Workmen Wages Payable for 36 months 9.00 Salary Payable for 20 months 100.00 PF Liabilities 3.80 Sales Tax/Commercial Taxes Due * 4.80 Other Statutory Dues 2.40

* On the sales tax and commercial taxes due, the Commercial Tax Authorities have already attached one of the immovable properties of the Corporate Debtor valued at ₹ 3.50 crores.

Fixed Assets includes buildings occupied on long term lease for a period of 75 years obtained from the State Industrial Development Authority (SIDA) for ₹ 5 Crores. SIDA has also submitted their claim with the RP stating that their premium amount along with interest and penal interest is due for since last 7 years. SIDA has filed its claim as a Financial Creditor. Whereas, the Resolution Professional has requested SIDA to submit its claim as an Operational Creditor. (This amount is included in Other Current Liabilities).

Further, it was informed by the Resolution Professional that the Corporate Debtor, M/s. Gupta Infra Private Limited, who initiated a CIRP against one of its Operational Creditor, namely C-Digital Arts Private Ltd for ₹ 6 Crores and going forward, the National Company Law Tribunal (NCLT) has already ordered for initiation of Corporate Insolvency Resolution Process (CIRP). However, one of the suspended Director on the Board of C-Digital Arts Private Limited filed an appeal before the National Company Law Appellate Tribunal (NCLAT) stating that there was no notice given as required under Section 8 of the Insolvency and Bankruptcy Code, 2016 read with Rule 5 of the insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 which entails that for initiation of insolvency resolution process by an Operational Creditor, a demand notice has to be served by the unpaid Operational Debtor on the Corporate Creditor. Nevertheless, the aforesaid suspended director he has not denied the debts due. This matter is pending before NCLAT for disposal.

Investments includes investment in Foreign Subsidiary of ₹ 30 Crores and in an Indian Subsidiary of ₹ 18 Crores and Investment in shares amounting to ₹ 2 Crores in another company incorporated and registered with charitable objects and not for profit.

Inventories and Receivables realisable only for 80% of its value.

Loan from related parties is from wife and son of one Director of GIPL.

Other Current Assets includes ₹ 10 Crores paid to National Highway Authority of India (NHAI) towards a bid amount for a road project.

Other Current Assets includes ₹ 2 Crores of assets of third party held under Trust. Machinery, the carrying value of which is ₹ 1.50 crores belonging to an Indian Subsidiary is lying in one of the Units of the Corporate Debtor.

A Machinery which was acquired for dispatching to the Foreign Subsidiary is also lying in the factory premises of the Corporate Debtor having a carrying value of ₹ 3 crores.

Cranes worth ₹ 5 Crores belonging to a proprietorship concern of one of the Director is also lying the Factory premises of the Corporate Debtor.

CIRP costs payable including all expenses is ₹ 2 Crores.

The Security Interest charged for COB Bank is 91.25% and SID Bank is 8.75%. (both the financial creditors have not relinquished their security interest).

During the CIRP, in one of the Meeting of the ‘Committee of Creditors’ (CoC), Resolution Plans were discussed. Revised Resolution Plans were submitted by the prospective Resolution Applicants.

Resolution Plan was put to e-Vote and by majority of 94.79%, the Resolution Plan of ‘GIPL’ was approved.

The Resolution plan proposes for utilisation of all assets including the assets under lease. Further, the Resolution Professional has sent a letter to the Commercial Taxes Authorities to release the property attached by them and on the contrary, the Authorities informed that the Department will get their portion as per the proposed Resolution Plan.

One of the Financial Creditor (SID Bank) sent an objection with respect to the distribution of the proceeds of the resolution plan under the Resolution Plan.

SID Bank also filed seeking direction to the Resolution Professional to distribute the proceeds of the Resolution Plan and made the following prayers :

“It is most respectfully prayed that :

1.The present application may kindly be allowed and the directions be issued to the Respondent No. 1 to modify/clarify the distribution to dissenting members as per the Resolution Plan and distribute the proceeds of the resolution plan to the Applicant SID Bank, for an amount of ₹ 8.97 Crores in priority in accordance with provisions of IBC, 2016 in the interest of justice and equity.

2.Interim stay be granted on distribution of the resolution plan amount by the Resolution Professional to the Committee of Creditors till the present application is decided.”

The case of the Appellant, namely SID Bank in the Application was that, as per the security interest of the Appellant, the Appellant is entitled to 8.75% i.e. the amount of ₹ 8.97 Crores and as per voting share as approved by the CoC, the Appellant is entitled to 5.21% i.e., ₹ 5.34 Crores. The case of the Appellant SID Bank set up in the Application is that he is entitled for his distribution of plan amount as per value of the security interest of the Appellant.

The Application was objected by the Resolution Professional. The Adjudicating Authority, by its Order, upheld the decision of the CoC for distribution of proceeds of the Resolution Plan as per the voting share. The Appellant, aggrieved by the said Order, has come up with the Appeal to the National Company Law Appellate Tribunal (NCLAT).

In the light of the above case study inputs and referring to the decisions of applicable case laws with reasons and the provisions of Insolvency and Bankruptcy Code, 2016 (IBC, 2016) and the Regulations made thereunder, answer the following questions :

(a)An agreement was entered into during August, 2006 between the ZY Infrastructures Private Limited (hereinafter referred to as ‘ZY Infra’) and WV Infrastructure Private Limited (hereinafter referred to as ‘the Corporate Debtor’), for development of land licensed with the ZY Infra admeasuring 8 acres into a residential group housing complex at Bengaluru. However, the ZY infra, being aggrieved by the Corporate Debtor’s alleged misconduct in advertising the project under its own name and without mentioning the name of the ZY Infra, sought reference to arbitration during May, 2011.

The arbitral proceedings culminated in an award dated 1st August, 2016 in favour of the ZY Infra. In addition to awarding a monetary claim, the award inter alia directed the Corporate Debtor to apply to the authorities for transfer of the requisite licenses to the ZY Infra.

Aggrieved by the award, the Corporate Debtor filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the ‘Arbitration Act’) during September, 2016.

On the same date, the ZY Infra filed execution proceedings in respect of the said award.

These execution proceedings were ultimately adjourned sine die on 22nd December, 2017 on account of the pendency of the proceedings under Section 34 of the Arbitration Act.

These proceedings under Section 34 of the Arbitration Act culminated in the award being upheld by Special Commercial Court with some modifications.

Corporate Debtor who has filed an appeal against the same under Section 37 of the Arbitration Act is stated to be pending.

Meanwhile, the Corporate Insolvency Resolution Process (‘CIRP’) was initiated against the Corporate Debtor in respect of three real estate projects by certain homebuyers who had invested in these projects. This application under Section 7 of the Insolvency and Bankruptcy Code (hereinafter referred to as ‘the IBC’) was admitted on 27th March, 2019 by the Adjudicating Authority. On the same date, an Interim Resolution Professional (‘IRP’) was appointed. The IRP issued a public announcement inviting claims from creditors, in accordance with Section 15 of the IBC read with Regulation 6 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter referred to as the ‘IBBI Regulations’) on 30th March, 2019.

After receipt of the claims, the IRP constituted the Committee of Creditors (‘COC’) on 6th November, 2019 and circulated the draft information memorandum and invited expressions of interest from prospective resolution applicants. Five such applications were received.

Thereafter, the IRP was replaced by Resolution Professional (RP) by the COC on 18th June,

2020. The resolution plan as submitted by TSK Residential Welfare Association was approved by the COC by a majority vote of 80.74% on 11th July, 2020. This plan was then submitted by RP to the Adjudicating Authority for approval under Section 31 of the IBC on 8th September, 2020.

ZY Infra sent an email on 19th August, 2020 to RP highlighting their pending claim of ₹ 35 Crores and odd against the Corporate Debtor arising from the arbitral award dated 1st August, 2016, confirmed with certain modifications in the proceedings under Section 34 of the said Act.

However, RP rejected this claim on 25th August, 2020 on the ground that the time period for submitting the claim was within 90 days of initiation of CIRP and the applicant was 287 days late. A Resolution plan had already been passed by the COC.

ZY Infra filed an application under Section 60(5) of the IBC. During the pendency of RP’s application for approval of the plan before the Adjudicating Authority, seeking directions to RP that the ZY Infra’s claim may be considered on merits.

This relief was granted to the ZY Infra by the Adjudicating Authority vide an order dated 3rd November, 2020 predicated on the following grounds :

(a)RP could not have summarily rejected ZY Infra’s claim, as this claim would have appeared in the Corporate Debtor’s books of accounts;

(b)In case such books of accounts were not available, RP had a duty to obtain them and verify the financial position; and

(c)as such announcement was made through public newspapers, it was likely that the appellant missed out on the same.

RP thereafter preferred an appeal under Section 61 of the IBC before the National Company Law Appellate Tribunal, New Delhi (‘NCLAT’) against the Adjudicating Authority’s order.

The NCLAT, vide the impugned order dated 30th July, 2021, did not favour the view adopted by the Adjudicating Authority. Their reasoning was as follows :

(i)RP had effectuated proper service for inviting claims in accordance with Regulation 6 of the IBBI Regulations which only mandates a pronouncement through newspapers and not through personal service—an aspect that was not disputed by the appellant;

(ii)The appellant failed to show that it filed its claim as soon as it came to know of the initiation of the CIRP.

(iii)RP even filed an application under Section 19 of the IBC before the Adjudicating Authority seeking that a direction be issued to the ex-management to provide all records. Although nothing came of this attempt, it reflected his sincere efforts;

(iv)Regulations 12 and 13 of the IBBI Regulations obliged the RP to accept claims filed within the extended period of 90 days of the commencement of CIRP.

(v)The resolution plan, as approved by the COC, would be jeopardised if new claims were entertained.

Consequent to the decision of the NCLAT, ZY Infra approached Supreme Court of India for the final resolution.

In the above background mentioning relevant case laws and applicable provisions of IBC and IBBI Regulations answer the following questions :

Background CIL Limited (hereinafter referred as ‘CIL’ or Corporate Debtor) is a manufacturer of precision engineering and automobile components, namely crankshafts for tractors, HCVs, LCVs as well as two-wheelers, as also connecting rods, steering knuckles and hubs. IBD Bank, one of the Financial Creditors of the Company has initiated a Corporate Insolvency Resolution Process (CIRP).

Appointment of Resolution Professional The National Company Law Tribunal (NCLT) has appointed Mr. RL as the Interim Resolution Professional and subsequently, he was confirmed as the Resolution Professional (hereinafter referred to as the “RP”) by the NCLT.

Receipt and Admission of Claims The RP received a claim for ₹ 1,850 crores and after verification of claims, the RP admitted a claim of ₹ 1,780 crores and the balance of claims was rejected by the RP.

Break-up of Claims Admitted Out of admitted claim of ₹ 1,780 crores, the Financial Creditors claim was ₹ 1,620 crores, Workmen Wages pending for a period of last 24 months is ₹ 18 crores, Employees pending claims for a period of last 12 months is 15 crores, Claims by Operational Creditors and Statutory Authorities is ₹ 127 crores.

Going forward, the RP published an “Expression of Interest.” Subsequently, it was revised on three different dates.

The Resolution Applicant (hereinafter referred to as the ‘RA’) submitted its first Resolution Plan during April, 2019 providing to pay ₹ 75 crores to all the stakeholders including ₹ 62 crores to Financial Creditors (FCs).

After a series of negotiations, the RA submitted an addendum to the Resolution Plan during May 2019 by which the RA raised the payment to Financial Creditors to ₹ 74 crores and at the request of the Committee of Creditors (hereinafter referred to as the “CoC”. Thereafter, once again, the RA submitted a Revised Plan during June, 2019 wherein the total pay- out was ₹ 86 crores and the Financial Creditors were to be paid ₹ 75 crores.

Further, the statutory requirement of the RP involving two approved valuers for giving reports, apropos fair market value and liquidation value was duly complied with and the figures in both reports were not at great variance.

The final Resolution Plan was submitted on August, 2019, in which the financial proposal/ total pay-out was increased to ₹ 130 crores and the Financial Creditors were to get upfront payment of ₹ 81 crores towards final settlement.

The total estimated liquidation cost and fee to the Resolution Professional and other connected/ incidental expenses was ₹ 3.30 crores.

Final Approval of the Resolution Plan by CoC.

This final Resolution Plan submitted by the Resolution Applicant during August, 2019 was finally approved by the CoC by a majority of 88% votes. In terms of such approval of the Resolution Plan, the RP moved Approval Application under Sections 30(6) and 31 of the IBC, 2016 seeking approval of the Resolution Plan before the Adjudicating Authority-NCLT.

In terms of the Resolution Plan, for which approval was being sought, the Corporate Debtor would be allowed the benefit of carry forward of its losses in terms of Section 79 of the Income Tax Act, 1961.

The NCLT, vide its order, by which the approval of the Resolution Plan was kept in abeyance, directed the Official Liquidator (OL) to provide the exact figures/value of assets. The same was carried in appeal under Section 61 of the Code by the RA before the NCLAT which passed the impugned Judgment on 19th January, 2022, dismissing the appeal, thereby upholding the order of the NCLT.

It is imperative to note that the moot question involved is the extent of the jurisdiction and powers of the Adjudicating Authority in the background of the admitted and undisputed factual position that no objection was raised by any quarter with regard to any deficiency/irregularity, either by the RP or the Appellant or the CoC in finally approving the resolution plan which was sent to the Adjudicating Authority–NCLT for approval. Further, the NCLT and the NCLAT did not fully recognise that under the Resolution Plan, the Corporate Debtor was set to be revived and not liquidated.

In view of the above, the RA filed an appeal before the Supreme Court.

In the light of the above inputs and referring to the applicable provisions of the IBC Code, 2016 and the Regulations framed thereunder together with the decided case laws, answer the following questions :

Sober Ltd. (the Company) is engaged in the business of running hotel chains in India as well as outside India. Due to less demand faced during the pandemic, the Company was unable to meet its financial obligations. Financial creditors of the Company decided to file an application under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). On 1 st January, 2022, Corporate Insolvency Resolution Process (‘CIRP’) of the Company started and Shyam was appointed as an Interim Resolution Professional.

The Company was subjected to parallel insolvency proceedings in India as well as Netherlands (where it had registered office). In the Netherlands, the Company was declared bankrupt and the Dutch trustee had been appointed to manage the estate of the Company. During the 1st meeting of the Committee of Creditors (CoC), Shyam was confirmed to act as Resolution Professional (RP). Considering the future potential in the Company, many strategic and financial investors expressed their interest in buying the Company including one of the members of the CoC who also submitted Expression of Interest to the RP. Shyam after due verification, published the final list of the prospective resolution applicants. One of the investors, Simba Ltd. wrote an email to Shyam stating that they also want to participate in the process and submitted all the required documents to Shyam for their name to get included in the final list of the prospective resolution applicants. Shyam refused to include their name in the final list stating that no provision exist under the IBC to include name of any party, once the final list of the prospective resolution applicants is published by the RP.

During the CIRP process, Shyam had appointed two valuers to carry out valuation. The fair value given by Valuer 1 was ₹ 1,750 crore and Valuer 2 was ₹ 550 crore and liquidation value was ₹ 1,000 crore and ₹ 200 crore respectively. During the discussions with the valuers to understand the methodology adopted by them to carry out the valuation, Shyam realized that both the valuers have carried out valuation based on the internationally accepted valuation methods and have made certain assumptions while arriving at the final numbers. Lawyer of Shyam had suggested that since the valuation given by Valuer 1 is advantageous for the stakeholders, he can put the valuation report issued by Valuer 1 before the CoC. Shyam agreed and moved ahead accordingly. During one of the meetings of the CoC, the financial creditors were deliberating on how to maximize the value of the Company and fetch a best possible resolution plan. In response, one of the members of the CoC requested the entire CoC to explore possibility of ‘Swiss Challenge’ to improve value of the resolution plans. However, none of the other members agreed stating that there is no provision under the IBC for exercising a ‘Swiss Challenge’. When the final resolution plans had come, the RP after due verification and completing required formalities, had put-up all the plans on voting. The outcome of voting was as under:

S. No. Particulars Voting result 1 Resolution Plan 1 56% 2 Resolution Plan 2 67% 3 Resolution Plan 3 67% 4 Resolution Plan 4 75% One of the members of the CoC suggested to carry out the voting again since the voting percentage of Resolution Plan 2 and 3 is same. The RP denied stating that once the voting is done, re-voting on the plans cannot be done again in the present scenario. Accordingly, Resolution Plan 4 was filed with the adjudicating authority for approval.

The resolution applicant had mentioned in the Resolution Plan 4 to put ₹ 80 crore in the form of working capital as well as capital expenditure, once the company’s handover formalities are completed. Even after 1 year of handover, the resolution applicant did not infuse the aforesaid amount. In fact, the resolution applicant requested the financial creditors to waive off the condition to infuse money for working capital and capital expenditure. Shyam being part of the monitoring committee, overseeing implementation of the resolution plan, expressed his concern on the request made by the resolution applicant citing violation of the provisions under the IBC. Consider the above case and relevant provisions of the IBC, its rules and regulations made thereunder, answer the following questions:

(d)Whether the following actions of Shyam are in accordance with the IBC?