In the matter of Reliance Capital Limited
IA No. 1/MB/C-I/2023 And IA No. 99/MB/C-I/2023 And IA No. 150/MB/C-I/2023 In C.P (IB) No. 1231/MB/C-I/202
Facts:
1.Corporate Debtor i.e. Reliance Capital Limited was admitted into (“CIRP”) vide Order dated 06.12.2021 and Mr. Nageshwara Rao was appointed as the Administrator. On 18.02.2022, the Administrator issued Invitation for Expression of Interest (“EOI”) in terms of Section 25(2) of the Code and Regulation 36A(1) of CIRP Regulations for the purpose of submission of Resolution Plans from eligible potential Resolutions Applicants.
2.On 19.04.2022, the list of Prospective Resolution Applicants (“PRAs”) was issued which included the name of the Applicant. The list was further revised on 20.10.2022. The Administrator issued Request for Resolution Plan (“RFRP”) on 26.04.2022 in terms of Section 25(2)(h) of the Code and Regulation 36B of the CIRP Regulations inviting submissions of the Resolution Plans. On 28.11.2022 the final Resolution Plan was submitted by the Applicant and IIHL under Option 1 in compliance with RFRP read with the Process Paper.
3.On 14.12.2022 the administrator issued the Challenge Process Note detailing the procedure for conduct of Challenge Mechanism pursuant to Regulation 39(1A) of the CIRP Regulation. Administrator issued the steps on 19.12.2022 for conduct of challenge mechanism. Thereafter, on 21.12.2022 the challenge mechanism was conducted, only two resolution applicants i.e. the Applicant and IndusInd International Holdings Limited (“IIHL”) participated in the Challenge Mechanism.
4.Auction commenced with minimum Threshold bid (i.e. amount required to be bid in order to continue to the next round) of INR 6,500 Crore in accordance with the Challenge Process Note on 21.12.2022. The Round 1 of the Challenge Mechanism concluded with the maximum net present value offered by one of the resolution applicants being INR 7,210 Crores. Round 2 of the Challenge Mechanism concluded with maximum net present value offered by one of the Resolution Applicants being INR 7620 Crores. Round 3 of the Challenge Mechanism concluded with maximum net present value being INR 8,550 Crores.
5.At the end of Round 3 the highest net present value bid submitted was by the Applicant at INR 8,550 Crores. Thereafter, the Applicant participated in the fourth the Challenge Mechanism and increased its net present value offer to INR 8,640 Crores. IIHL participated until the third round of challenge mechanism at INR 8110 crores. An email dated 21.12.2022 (with the subject line “Conclusion of the Challenge Mechanism”) was also circulated by the Administrator to all resolution applicants during the Challenge Mechanism, stating that the highest NPV bid of INR 8640 crores was received in accordance with the Process Note, in particular Section 6 of the Process Note
6.On 22.12.2022 the Administrator requested the Applicant and IIHL to submits its plan within 24 hours incorporating its highest bid amount in the Challenge process. It was noticed that the covering email of IIHL included revised NPV of INR 9,000+ crores, which was in deviation from the final bid submitted by them in the challenge mechanism process i.e., INR 8,110 crores. Applicant addressed a letter dated 23.12.2022 to Administrator delineating its objections to revised bid submitted by IIHL and requested the Administrator to not accept the revisions in the bid by IIHL in breach of its own process documents including RFRP, the process paper, the Challenge Process Note and the steps issued to the PRA
Issue: Whether the issuance of process note for extended challenge mechanism is in violation of Regulation 39 (1A) of the CIRP Regulations?
Arguments:
For applicant:
1.Counsel for applicant submits that Challenge Mechanism has been issued pursuant to the RFRP which was re-issued on 22 October 2022 under Regulation 36(B)(7) of the CIRP Regulations in terms of the Process Paper. The Challenge Mechanism and the RFRP must be read together in a consistent manner. Since both the Process Paper and the Challenge Mechanism have been issued in terms of the scheme envisaged under Regulation 36B(7) and 39(1-A) respectively, the steps/terms contained therein were issued by the Administrator (with the approval of the CoC), being cognizant of the express provisions of the RFRP. Accordingly, such steps/terms cannot be superseded or defeated (whether by reliance on generic provisions of the RFRP allowing multiple modifications despite the express provisions contained in the CIRP Regulations or otherwise) through the illegal exercise of commercial wisdom, in derogation of and outside the scheme permitted and prescribed under the Code and the CIRP Regulations.
2.Any discretion or reservation of rights that vests with the Administrator and/or the CoC by virtue of the RFRP and the Challenge Mechanism, can only be read in a manner consistent with the Code and the CIRP Regulations. It was submitted that Administrator and the CoC rely on Clauses 4.2.4 and 4.2.9 of the original RFRP to clothe themselves with ultra vires powers under the guise of ‘commercial wisdom’. Torrent submits that Clauses 4.2.4 and 4.2.9 cannot be read to override or depart from Regulations 39 (1A), 39(2) and 39(3)(a). Hence, these provisions can only mean compliant resolution plans and not non-compliant resolution plans.
3.Applicant contends that the mandate to ascertain whether or not a resolution plan complies with the mandatory requirements of the Code and the CIRP Regulation is that of the Administrator. CoC cannot have any involvement in the review of resolution plans before the Administrator can decide whether or not they comply with the Code and the CIRP Regulations.
4.It was submitted that Resolution Plan Submission Process for Reliance Capital Limited (“Revised RFRP”) which was issued on 22 October 2022 in furtherance of Regulation 36B (7), prevails over the RFRP (including the provisions which purport to bestow an unfettered right to negotiate on the CoC). It is submitted that the Revised RFRP, which details the steps of the insolvency process, clearly states that “This is a part of the RFRP. No other term of the RFRP shall be considered amended or modified and should any contradictions arise between the RFRP and this Process Paper, the Process Paper shall prevail”.
5.The word ‘may’ in Regulation 39(1-A) only points to the discretion of the CoC and the resolution professional to choose between the two options provided in (a) and (b) or to accept resolution plans as they are submitted. It does not license the CoC/resolution professional to change its decision or modify the approach prescribed under (a) or (b), if it does elect to opt for one of the two options under Regulation 39(1-A). It is submitted that, based on the provisions of the RFRP (particularly item 7 of the revised RFRP dated 22 October 2022 which requires the CoC to proceed directly to vote on all compliant plans once the Challenge Mechanism is concluded) and the Challenge Mechanism, read with Regulation 39(1A), the CoC must imitate the CoC in Jindal Stainless i.e. it must now vote on compliant resolution plans submitted upon the conclusion of the challenge mechanism.
6.Revised bid submitted by IIHL is not in consonance with the Challenge Mechanism and continues to be non compliant. IIHL has proposed an illegal financial proposal wherein additional and bonus payments to the tune of INR 890 crores over and above the NPV bid amount of INR 8110 crores. Submission of resolution plan on December 22, 2022 was to only incorporate the highest NPV bid of the resolution applicant in its resolution plan. As per the template, IIHL could not have payments over and above the NPV bid amount in form of additional payments or bonus amounts. Furthermore, it is not by accident and co-incidence that the values in the revised resolution plan submitted by IIHL still add up to INR 9000 crores. It is an attempt of IIHL to portray and mislead that NPV remains at INR 8110 crores and a few payments unrelated to NPV are being made.
7.Applicant submits that the CoC is attempting to conduct a fresh challenge mechanism, in complete violation of Regulation 39(1-A) and the terms of the Challenge Mechanism. CoC cannot ignore the Code, the CIRP Regulations and the terms of the RFRP and the Challenge Mechanism under the garb of ‘commercial wisdom’ and ‘value maximization’. The Code and the CIRP Regulations prevail and must be followed notwithstanding the deference to CoC’s commercial wisdom.
8.Applicant submits that the Minutes of the Meeting of the CoC held on 23rd December 2022, 3rd January 2023 and 6th January 2023 plainly contain the admissions that the challenge mechanism was already concluded with the announcement by the Administrator of the highest NPV. In round 3, IIHL submitted their bid below the threshold limit. Thereafter, in Round 4 Torrent submitted a bid below the threshold limit of Round 4. Torrent conveyed its inability to continue further and since there were no other participants, the challenge mechanism was concluded after receiving a formal confirmation from Torrent on request in relation to their exit from the challenge mechanism process.
9.It is the Applicants contention that as early as on 23rd December 2022, the Administrator had determined that IndusInd International Holdings Limited’s plan was not as per the challenge mechanism. He had nevertheless placed IndusInd International Holdings Limited’s noncompliant plan before the CoC for consideration, and the CoC was considering this plan along with Torrent’s plan.
10.Applicant submits that all Resolution Applicants were required to submit their bids in the challenge mechanism in a particular format. Following this format, Torrent bid for an NPV of 8,640 crores i.e. total payment to creditors and, in its ensuing proposal filed on 22nd December 2022, it provided for a breakup of its NPV (that is upfront payment and deferred payment, as per Clause V of the Challenge Mechanism Process Note). The break up was not the highest NPV submitted during the Challenge Mechanism
For Respondent:
1.Counsel submitted that Applicant is simply a prospective resolution applicant/ bidder whose status as successful or unsuccessful has not been decided by the Committee of Creditors. Resolution plans compliant with the provisions of the IBC have not even been placed before the CoC. The process is at the draft submission and verification stage. Therefore, when no resolution plans have been placed before the CoC and no final determination has taken place, the captioned Application is premature.
2.Respondent No.1 submits that before the vetting process qua the two plans received on 22.12.2022 could be completed, the Applicant on 30.12.2022 filed the present Application. On 03.01.2023, this Tribunal granted ad-interim relief in prayer clause ‘e’ of the Application. The Administrator has complied with this order and has not placed any non-compliant plan for consideration before the CoC. Administrator submits that he had to only give his opinion, ultimately the final decision whether the plans stood verified or not vests with the CoC. The role of the administrator by law to only give a prima facie opinion on whether the plan complies with Section 30(2) of the Code.
3.CoC in its 6th January 2023 meeting has found that the NPV of INR 8,640 crores that has been presently offered to be a sub-optimal outcome especially since the said offer was even lower than the liquidation value of the Corporate Debtor. Accordingly, the CoC in exercise of commercial wisdom and pursuant to the RFRP inter alia called for further negotiations with all PRAs through the Extended Challenge Mechanism
4.It was submitted that the stage of putting any plan to vote by the CoC has not arisen. The Administrator and CoC were still evaluating the plans and no decision was made or communicated in respect thereof when the Applicant approached this Tribunal. The agenda of the CoC meeting on 3rd January, 2023 was only to update on the resolution process of the Corporate Debtor no presentment of plan or voting was envisaged, or indeed could have been envisaged, since the plans were only drafts and were not compliant resolution plans. Under the framework of the IBC, as well as the provisions of the RFRP, only legally complaint plans can be placed before the COC for voting
5.The resolution applicant with the highest NPV in challenge mechanism has no vested right to be necessarily considered or declared as a successful resolution applicant. It is settled law that a bidder has no vested rights in the process merely by virtue of participating in the process. It was argued that the CoC and Administrator has to consider
whether the final signed resolution plans, as submitted to them after incorporating their comments, comply with the requirements under the IBC and RFRP (including Challenge Mechanism) and are acceptable to CoC. That stage has not been reached as yet.
6.It is submitted that the conditions and values in the plans submitted by the Applicant as well IIHL were not acceptable to the CoC. Hence, CoC exercising its commercial wisdom (with 98% of the CoC voting in favour), decided to have an extended round of challenge mechanism with a view to achieve value maximisation. It is submitted that since it is within the powers of the CoC to reissue the RFRP under Regulation 36B and re-initiate the entire process
without any limitation other than the prescribed timelines, there can be no legal impediment to the CoC extending the challenge mechanism.
7.In fact, it is in the interest of achieving resolution in a time-bound manner that the CoC extended the challenge mechanism rather than re-initiating the entire process. The re-initiation of process will be prejudicial not only to CoC but also the other resolution applicants due to significant delay in rerun, return of the security provided by the resolution applicants and reissue of that security by resolution applicants that choose to participate.
8.It was contented that the said IA No. 1 of 2023 is premature as the CoC / Administrator has not issued any Letter of Intent to any prospective resolution applicant as the resolution is still at a stage of consideration. A bare reading of Clause 4.4.8 of the RFRP would make the same evident that the status of Torrent at this stage is nothing more than a mere bidder upon whom no vested right or interest has accrued and not that of a Successful Resolution Applicant. COC has no obligation to accept the bid of Torrent, and Torrent cannot insist for its bid to be accepted by the Committee of Creditors. The decision to conduct rebidding/further bidding and thereby modify the resolution process is not only in the domain of commercial wisdom of the Committee of Creditors but also binding upon Torrent in terms of the RFRP. Reliance is placed on clause 4.2.9 of the RFRP.
9. As per the provisions of the Request for Resolution Plan (“RFRP”), the Committee of Creditors has reserved in itself wide and sweeping powers which would allow the Committee of Creditors to conduct a comprehensive assessment of viability and thereby achieve the best possible value from the bidders.
Decision: Process Note issued was in violation of Regulation 39(1)(A) of the CIRP Regulations.
Rationale:
1.NCLT noted that the Administrator, either on its own or on the instructions of the CoC, never changed the modalities of the challenge mechanism or revised the challenge mechanism despite reserving the power to do so under clause 11 of the challenge mechanism and instead concluded the challenge mechanism and declared so. Thereafter, the Administrator was required to undertake the steps for ensuring the compliance of the plans with the provisions of the challenge mechanism and also other compliances under the Code and the CIRP Regulations under Regulation 39(2) of the CIRP Regulations and thereafter, CoC is mandated to take voting on the compliant plans under Regulation 39(3) of the CIRP Regulation
2.Perusal of the Regulation 39 and its objects and reasons brings out an unambiguous conclusion that Regulation 39 (1A) enabled the Resolution Professional and the CoC and recognized their right to carry out value maximization process even after submission of the resolution plans by the resolution applicants. However, along with this right, a responsibility and duty are casted to follow the value maximization process in a regulated manner i.e., in the manner prescribed in Regulation 39(1A) and therefore in the time bound manner, which is a fundamental principle of the IBC along with value maximization. It held any interpretation of Regulation 39(1A) which makes the process of value maximization an endless exercise would be inconsistent with the objects of the Insolvency laws.
3.The CoC may at its commercial wisdom suggest various commercial parameters for the process to be undertaken by the Resolution Professional under Regulation 39 (1A), however once the process is determined and the Resolution Professional has decided to undertake one alternate process under Regulation 39 (1A), thereafter, the process need to
be strictly followed. The process sanctity thereafter needs to be ensured by the Resolution Professional, being personally responsible for the conduct of the resolution process under the Code. The CoC is equally bound to follow such process. The Resolution professional need to complete the subsequent stages of resolution process which includes undertaking compliance check of the plans and submitting the complaint plans to the CoC. The CoC then have to complete the consideration of the plans and vote on the complaint plans in terms of Regulation 39(3).
4.The extended challenge mechanism in the instant case, as it appears from the minutes of the meeting of CoC held on 23.12.2022 and 03.01.2023 & 06.01.2023, was in fact decided on the basis of a late bid submitted by IIHL. In our view a late bid is not allowed to be considered as per the challenge mechanism and the assurance given by the Administrator in its letter dated 22.12.2022, and therefore any decision on second challenge motivated by the late bid, besides running foul to the process set out in Regulation 39 (1A), suffers from the same infirmity as a late bid and any subsequent thought on sub-optimal or non-satisfactory apparently motivated on this basis should not be allowed.
5.If the RP/CoC is allowed to conduct multiple challenge mechanism, it would lead to an open-ended process with no finality and render Regulation 39(1A) and (1B) otiose and nugatory and further Discourage/dissuade the RA’s from putting their best bids in the challenge mechanism in the hope of topping the results of challenge mechanism subsequently trigger for exercise of a commercial wisdom cannot be a late and unsolicited toppling bid, submitted illegally post conclusion of the challenge mechanism. Something which is not allowed directly cannot be allowed to be done indirectly.
6.In the case in hand, the toppling bid from IIHL came after the conclusion of the challenge mechanism. It is not the case where the CoC has chosen to modify the challenge mechanism prior to the conclusion of the challenge mechanism in exercise of its commercial wisdom, which itself need to be based on legitimate and legal grounds. A specific representation was given by the Administrator to the Applicant vide mechanism. A specific representation was given by the Administrator to the Applicant vide the 23rd December, 2022 letter. Further, in the minutes of the CoC meeting held on 23rd December, 2022, it was categorically recognized that the challenge mechanism was conducted in the completely fair, transparent, and non-arbitrary manner and that the late and unsolicited bid illegally submitted by the IIHL was in deviation to the challenge mechanism
7.Untrammeled powers of the CoC to negotiate under the provisions of the RFRP in exercise of its commercial wisdom is circumscribed by the framework for value maximization provided under the Insolvency and Bankruptcy Code, 2016 (“Code”) read with the CIRP Regulations. The RFRP, being a creature of CIRP Regulations, its provisions cannot be used to defeat the scheme laid down by the IBBI under the very same CIRP Regulations. It is settled law that any powers of the CoC, including the exercise of its commercial wisdom is limited/circumscribed by the provisions of the Code read with the Regulations.
8.The CoC erroneously assumed commercial wisdom to run a second challenge mechanism despite concluding a fair and transparent challenge mechanism on 21 December 2022. In our view, given the earlier pitfalls and anomalies in the negotiation processes of the CoC and the subsequent introduction of Regulation 39(1A) where the discretion of the CoC was circumscribed by a regulated process of value maximization, it would not be correct to view the process under Regulation 39(1A) as bestowing unbridled powers on CoC
Order:
