Alert: Your Resolution Plan below the Liquidation Value may be rejected?
ORDER
The Hon’ble National Company Law Appellate Tribunal (NCLAT) has, by way of its order dated November 13 2019, in the matter of Accord Life Spec Private Limited (Appellant) vs Orchid Pharma Limited & Ors (Respondents) in Company Appeal (AT) (Insolvency) No. 761 & 762 of 2019 inter-alia mentioned that no ‘Resolution Plan’ can offer any amount upfront or by other way, which is less than the ‘Liquidation Value’ and therefore set aside the Resolution Plan as approved by the Adjudicating Authority.
BRIEF FACTS
The following facts are noteworthy:
(a) In the Corporate Insolvency Resolution Process (CIRP) against Orchid Pharma Limited (CD), one Mrs. J. Srinisha (Unsuccessful Resolution Applicant) filed application before the Hon’ble National Company Law Tribunal, Chennai Bench, Chennai (NCLT) for direction on the Resolution Professional (RP) to reconsider the Resolution Plan submitted by Dhanuka Laboratories Limited (Successful Resolution Applicant). The NCLT by impugned order dated June 25/27 2019 dismissed the application on the ground that Resolution Plan was considered on merit, based on viability and feasibility of the Plan. The said order dated June 25/272019 was challenged by the Appellant in one of the Appeal, i.e., Company Appeal (AT) (Insolvency) No.762 of 2019.
b) The Resolution Plan submitted by Successful Resolution Applicant was approved by the NCLT by impugned order dated June 25/272019. The aforesaid order has been challenged by the same Appellant in Company Appeal (AT) (Insolvency) No.761 of 2019.
Submissions by Appellant before NCLAT
c) The Resolution Plan submitted by Successful Resolution Applicant was approved by voting share of 65.33%, as opposed to the statutory requirement of 66%, as required under Section 30(4) of the IBC.
d) The Resolution Plan submitted by the Successful Resolution Applicant is not viable nor feasible. It was initially dissented by the Members of the Committee of Creditors (CoC), but subsequently, they voted in favour.
e) The actual Resolution Value proposed by Successful Resolution Applicant is Rs.570 crores as against Liquidation Value of Rs. 1309 crores. A tabular statement was submitted by the Appellant cum Unsuccessful Resolution Applicant comparing the Liquidation Value and the approved Resolution Plan submitted by Successful Resolution Applicant which is quoted below: –
Liquidation Value (Amount in Crores) | As per approved Resolution Plan (Amount in Crores) | ||
Other assets | 1002.26 | Funds infused by Successful Resolution Applicant | 570.00 |
Cash balance as on CIRP commencement date | 123.18 | Cash Balance of Corporate Debtor as on 31.03.2019 | 321.98 |
|
| OPL EBITDA + surplus cash (estimates) – (made available for distribution to creditors) | 30.00
|
|
| WC infusion through equity by Successful Resolution Applicant | 40.00
|
Cash Balance (disputed between lenders) | 184.06 | Cash Balance (disputed between lenders) | 184.06 |
Total | 1309.50 | Total | 1146.04 |
f) The Unsuccessful Resolution Applicant further submitted that the equity infusion of Rs.40 crores as working capital cannot be included in the resolution value for the purpose of finding out the value of the ‘Plan’. The upfront payment alleged to be less than the ‘Liquidation Value’ of Rs.1309 crores.
g) The Appellant also submitted, if the increase in cash balance from Rs.123.18 crores to Rs.321.98 crores is also factored, the ‘Liquidation Value’ would be Rs.1508.30 crores.
h) The CoC has constituted a Sub-Committee in its 19th meeting on May 24 2019 to negotiate with all the Resolution Applicants.
i) The impugned order approving the resolution plan is non-speaking one and the NCLT has not said as to how the Resolution Plan satisfies Section 30(2) of the IBC, which is mandatory.
Submissions by State Bank of India (One of the CoC members) before NCLAT
j) That Rs.184.06 crores cannot be treated to be as belonging to the CD and belongs only to the State Bank of India.
Submissions by Successful Resolution Applicant before NCLAT
k) Liquidation Value is only a notional value and the same can never be realized in case of actual ‘Liquidation’ at a later stage. In this regard, reliance was placed on the definition of Liquidation Value as provided in Regulation 2(k) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which means the estimated realizable value of the assets of the Corporate Debtor, if the ‘Corporate Debtor’ were to be liquidated on the insolvency commencement date
HIGHLIGHTS OF THE ORDER
Some of the key highlights of the order are:
a) With respect to the voting share, the Hon’ble NCLAT mentioned that according to the RP and also apparent from the impugned order dated June 25/27 2019, we find that the Resolution Plan was approved by the CoC with 67.07% of voting share.
b) Constitution of such Sub-Committee has been held to be illegal by this Appellate Tribunal in its decision in Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors. – Company Appeal (AT) (Ins.) No.242 of 2019 etc. decided on July 4 2019.
c) The Liquidation Value is decided before the publication of the Information memorandum, which is published for the purpose of calling for Resolution Plan from eligible ‘Resolution Applicants. It cannot be accepted that Liquidation Value is Notional Value and can never be realized during the Liquidation.
d) The aim of the Code is to consolidate and amend the law relating to reorganization and insolvency resolution of corporate persons, partnership firms and individual persons in a time bound manner for maximization of the value of assets of such persons (Corporate persons herein), to promote entrepreneurship availability of credit and balance interest of such persons (Creditors)/ stakeholders. The maximization of value of assets of the Corporate Debtor as also the maximization of the assets of the Financial Creditors and the Operational Creditors are the basic essence of the IBC. Section 30(2)(b) of the I&B Code, as latest amended and applicable, reads as follows: –
“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;”
e) Even if the earlier unamended Section 30(2)(b) of the IBC is considered, the basic feature of the IBC 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.
f) Infusions of fund for maximization of the assets of the Corporate Debtor cannot be counted for the purpose of the amount, which is being kept for distribution amongst the stakeholders, including the Financial Creditors and Operational Creditors, if it is less than the Liquidation Value, such Plan cannot be upheld, being against the object of the I&B Code and Section 30(2) of the said IBC.
g)Admittedly, the amount offered in favour of stakeholders including the Financial Creditors and the Operational Creditors is being much less than the Liquidation Value, such Plan cannot be accepted.
CONCLUSION
By this order, the Hon’ble NCLAT inter-alia didn’t set-aside the impugned order dated June 25/27 2019 ordering approval the Resolution Plan.
COMMENTS BY AUTHOR
As per the list namely “Corporate Insolvency Resolution Processes Yielding Resolution: As on June 30 2019” uploaded on the website of IBBI, there are many cases in which liquidation value was more and the Realisable Amount to FC & OC was less and the plans were approved. The said list is attached and details of those cases are highlighted in yellow.
Relevant Links:
1) NCLT order dated June 27, 2019 : https://ibbi.gov.in//webadmin/pdf/order/2019/Jul/27th%20June%202019%20in%20the%20matter%20of%20Orchid%20Pharma%20Limited%20MA-579-2019%20in%20CP-540-IB-2017_2019-07-16%2016:13:57.pdf
2) NCLAT order dated November 13, 2019: https://nclat.nic.in/Useradmin/upload/1248178415dcc0220b616e.pdf
3) List of CIRP Yielding Resolution: As on June 30 2019: https://ibbi.gov.in/uploads/whatsnew/fce5d9520e440aace08605362222fd29.pdf
Date: November 18, 2019
About the Author: The author (CS Lovkesh Batra) is Company Secretary by profession and works in the area of Insolvency & Bankruptcy Law.
Disclaimer: The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author does not take responsibility of the same and this document cannot used to be quoted before any authority under any law.
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