M.K. RAJAGOPALAN vs DR. PERIASAMY PALANI GOUNDER & ANR
CIVIL APPEAL NOS. 1682-1683 OF 2022
Facts:
1.Corporate debtor, Appu Hotels Limited, is a limited company with corporate identification number U92490TN1983PLC009942. Corporate debtor availed project loans to construct ‘Le Meridian, Coimbatore’, from a consortium of bankers led by Indian Bank. The promoters and directors brought in nearly Rs. 100 crore as unsecured loans over and above the cash flow to keep the corporate debtor’s asset as standard.
2.Corporate debtor defaulted in the payment of dues which resulted in Section 7 application filed by the Financial Creditor which was admitted vide order dated 05.05.2020. IRP issued a public announcement in Form A on 08.05.2020 inviting claims from various stakeholders in the corporate debtor.
3.In the second CoC meeting conducted on 06.08.2020, the proposal of IRP in relation to information memorandum and to seek EOI by publication of Form G was approved. Two sets of valuators were engaged as registered valuators by IRP. On 26.09.2020, the IRP published the final list of prospective resolution applicants. Pursuant to publication of provisional list and upon preliminary scrutiny, thirteen of the EOIs received were initially found eligible, of which, one had withdrawn and the other namely, Sri Balaji Vidyapeeth (of which the successful resolution applicant was the managing trustee), was declared ineligible since a charitable trust cannot run a profit-making entity. Hence, the final list of eleven prospective resolution applicants was submitted before the CoC on 26.09.2020
4.Finally Plans were received from Mr. Madhav Dhir, Mr. M.K. Rajagopalan (the resolution applicant – appellant herein) and Kotak Special Solutions. In the 6th COC meeting held on 16.12.2020 RP informed COC that he had provided the CoC members with the fair value and liquidation value to all those who had submitted the confidential undertaking and that that due to significant difference in the value of land and building submitted by the valuers appointed by IRP, he shall have to appoint third valuer in accordance with Regulation 35 of the CIRP Regulations. It was also noted that valuation of non-core assets was not done earlier but, the third valuer appointed by RP had submitted the value of non-core assets and the same had been shared with CoC members who had submitted their undertaking
5.In the seventh CoC meeting held on 29.12.2020, the RP briefly discussed the resolution plan submitted by Mr. M.K. Rajagopalan, resolution applicant and after discussing on the resolution plan so submitted, the resolution applicant was asked to submit the revised resolution plan after incorporating the changes suggested by the CoC members and he promised to do so by 30.12.2020. In the eighth CoC meeting held on 04.01.2021, the revised resolution plan of the resolution applicant was presented and discussed with CoC members. After long deliberation on various aspects of the plan, it was decided that the plan could be put to vote through CoC meeting on 22.01.2021.
6.On 21.01.2021, just a day before the resolution plan was to be put to voting, the promoter and erstwhile director of the corporate debtor submitted another OTS proposal with reference to Section 12-A of the Code to the CoC. A so-called “Term Sheet” dated 22.01.2021 issued by Deutsche Bank was relied up as a proof of funding.
7.Plan was approved with 87.39% of the total voting share of financial creditors present and voting in the meeting, the RP was required to send the resolution plan back to the resolution applicant as there was dissent by some of the financial creditors and in terms of Section 30 (2) of the Code, the amount to be paid to dissenting financial creditors shall not be less than the amount paid to such creditors in accordance with Section 53 in the event of liquidation of the corporate debtor.
8.On 25.01.2021, the resolution applicant submitted the revised resolution plan incorporating the changes. In the ninth meeting dated 22.01.2021, even while approving the resolution plan, the CoC asked the resolution applicant to further revise the resolution plan, particularly in relation to the dissenting FC. The resolution applicant indeed revised the resolution plan but, such a revised plan was not placed in CoC before presenting the matter to the Adjudicating Authority for approval
9.An application bearing IA No. 150 of 2021 was filed by the resolution professional under Section 30(6) of IBC before the Adjudicating Authority (NCLT) for approval of the resolution plan. NCLT allowed the resolution plan as approved by CoC vide order dated 15.07.2021.
9.Challenging approval of the resolution plan, several appeals were preferred before the Appellate Tribunal (NCLAT), which were decided in the impugned common judgment and order dated 17.02.2022. The Appellate Tribunal, while upholding several of the objections against the process of consideration of the resolution plan as also the eligibility of the successful resolution applicant, allowed all the appeals; set aside the aforesaid order dated 15.07.2021; rejected the resolution plan so approved by the NCLT.
Issues:
1.Whether the valuation process of the assets of the corporate debtor had been in violation of the Regulations 27 and 35 of the CIRP Regulations and thereby, approval of the resolution plan had been in contravention of Sections 30(2) and 61(3) of the Code?
2.Whether non-publication of Form G on the designated website was a mere procedural irregularity which did not prejudice interests of any of the parties?
3.Whether the Appellate Tribunal has overstepped its jurisdiction by declaring the resolution applicant ineligible under Section 88 of the Trusts Act and disqualified under Section 164(2)(b) of the Companies Act.?
4.Whether the resolution applicant is ineligible to submit a resolution plan so as to act as alter ego of the trust “Sri Balaji Vidyapeeth” that had already been declared ineligible; and submission of plan by resolution applicant is barred by virtue of Section 88 of the Trusts Act?
5.Whether the Appellate Tribunal has erred in holding that the resolution plan in question, which was placed before the Adjudicating Authority for approval, was void and non-est in law because in the ninth CoC meeting dated 22.01.2021, the resolution plan was sent back to the resolution applicant for further revision; and the revised resolution plan thereafter submitted by the resolution applicant on 25.01.2021 was directly filed before the Adjudicating Authority without being put to vote before CoC?
6.Whether the claims of related party creditors is to be treated at par with the unrelated creditors?
Arguments:
For Appellants:
1.Counsel for the Appellant submitted that entitlement to file for withdrawal of the application admitted under Section 7 of the Code would be restricted to TFCI i.e., the applicant who had filed the application, with the approval of ninety per cent. voting share of the CoC and such an application for withdrawal could have only been moved through the resolution professional
2.It was also submitted that letter of settlement dated 21.01.2021 was submitted without proof of funds and there was no commitment towards funding in the proposal indicated in the Deutsche Bank Indicative Term-Sheet dated 22.01.2021. Even the letter of support for funds dated 14.07.2021 as issued by Saveetha Institute was withdrawn by a subsequent email dated 02.09.2021.
3.It was submitted that Section 88 of the Trusts Act would not be treated as a ground for disqualification of the appellant under Section 29-A of the Code. Although the trust in question was held to be ineligible at the stage of EOI, the appellant was still held to be eligible in his individual capacity. Thus, while the trust may be disqualified, the trustee, being a separate entity, cannot be disqualified and the financial capability of the appellant was independent of the trust money.
4.Appellant could not be held ineligible under Section 29-A(e) of the Code, as the registrar of companies had not disqualified him under Section 164(2)(b) of the Companies Act for the alleged non-refunded deposit in the other company International Aviation Academy Pvt. Ltd, in which the appellant was a director. Further, the DIN status of the appellant was “active compliant
5.It was submitted that resolution plan cannot be set aside on the basis of a contention that the valuation was lower than the liquidation value.
6.As for non-publication of Form-G on the website is concerned, it was submitted that the issue was discussed during the fifth CoC meeting dated 12.11.2020 and the CoC proceeded with the CIRP in its commercial wisdom after a detailed deliberation. Also the Form-G was published in all leading newspapers on 09.08.2020 and the then IRP had emailed IBBI to intimate them that there was some technical issue in uploading the said form on the website, with a request to upload the same. Moreover, the earlier judgment of NCLAT dated 05.05.2021 approving non-publication would act as res judicata
7.As regards the issue of not placing the revised final resolution plan before the CoC, it was submitted that the appellant had already complied with the requirement of allocating the eligible amount to dissenting financial creditors in the event of liquidation, as per the revised plan and there was no need to seek further approval of the CoC. Moreover, in the tenth meeting, the CoC had granted a ‘deemed post facto approval’ to the revised plan and had not objected to any of its portions in the affidavit filed before NCLAT dated 09.09.2021.
8.As regards the question of valuation, it was submitted that the only responsibility of RP under Regulation 35(2) of the CIRP Regulations has been to share the fair value and liquidation value with the members of CoC after obtaining a confidentiality undertaking, which was done in the present case. There is no requirement to provide a copy of the report to the CoC or any other stakeholder.
9.It was submitted that there is a need only to ensure that the plan provides for payment to financial creditors (including dissenting financial creditors) entitled to vote. Placing reliance on Section 30(2)(b)(ii), Section 21 and Regulation 38(1), it has been argued that the approved plan is in accordance with the Code and the Regulations.
For Respondents:
1.Counsel submitted that the CoC approved the resolution plan in question without considering the settlement proposals put forth by the promoter under the letters dated 21.01.2021 and 08.03.2021, for settling with all creditors and for withdrawal of CIRP under Section 12-A of the Code.
2.It was submitted that resolution plan in question is contrary to law, as it clearly violates the underlying principles of Section 88 of the Trusts Act and Section 164(2)(b) of the Companies Act, 2013. The main plank of submissions with respect to violation of Section 88 of the Trusts Act has been that there is a conflict of interest, as the appellant is competing in his capacity as an individual with interests of a trust in which he was the founding managing trustee.
3.It was submitted that the fact that the trust was a prospective resolution applicant and was found to be ineligible was a fact suppressed from the knowledge of the COC.
4.It was submitted that resolution applicant’s plan to convert Coimbatore property into Hospital would directly result in a conflict of interest and breach of fiduciary duties owed by him as managing director of the company MGM Healthcare Private Limited. This, according to the learned counsel would be in direct violation of Section 166(4) of the Companies Act which prohibits a director of the company from involving himself in a situation in which he may have direct or indirect interest that conflicts or possibly may conflict, with the interest of the company. For this reason too, the resolution plan in question is contrary to law and cannot pass muster under Section 30(2)(e) of the Code.
5.It was argued that resolution applicant has been the director of a company named ‘International Aviation Academy Private Limited’; and as per the audited financial statements of the said company for 2010-2011 to 2017-2018, there was evidence that Rs. 12,03,000 had been collected as “share application money pending allotment” and had not been refunded. This would result in the same being treated as an “unrefunded deposit” within the meaning of the proviso to Explanation (A) of Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014 and result in disqualification of the appellant-resolution applicant, from being a director under Section 164(2)(b) of the Companies Act and, consequently, from being a resolution applicant in CIRP in question.
6.It was submitted that there was no physical verification because the appointed registered valuers were based in Delhi and sought to delegate the process of physical verification to their associates in Tamil Nadu. Concerns regarding this were also highlighted in the second CoC meeting dated 06.08.2020. Further, it has been submitted that the valuation of the non-core assets was carried out irregularly and not in accordance with Regulation 35 of the CIRP Regulations. In addition, only bare valuation figures were shared and the valuation reports were not furnished to the erstwhile directors and the members of CoC
7.It was submitted that the revised plan was directly placed before the NCLT and not before the CoC which stands in violation of Sections 30(2), 30(4), 30(6) and 31 of the Code. Further, it has also been contended that Section 31 of the Code does not envisage any post facto ratification of a resolution plan.
8.It was submitted that there is neither any bar on the submission of multiple settlement proposals for withdrawal under the said Section nor a cut-off date within which the proposal has to be made during the CIRP. It was submitted that in the seventh and eighth CoC meetings, it has been submitted that there was a certain amount set apart for related parties, however, in the final resolution plan, there was no amount stated to be paid to the related parties and there had not been any discussion in the CoC in this regard. Thus, for Dharani Finance being an operational and a financial creditor, the failure to provide for discharge of its debt in the final resolution plan, is in violation of Sections 30(2)(b), (e) and (f) of the Code.
Decision: Hon’ble Supreme Court partly allowed the appeal against the order of the NCLAT dated 17.02.2022 by holding that:
a. Members of CoC were provided with fair value and liquidation value after obtaining a confidentiality undertaking and disagreed with the view of NCLAT that commercial wisdom of CoC was materially affected for want of existence of a valid and actual valuation report and sharing of all the relevant facts pertaining to the valuation with the members of CoC leading to violation of Regulations 27 and 35 of the CIRP Regulations.
b. The Adjudicating Authority has also rightly observed that a statutory provision regulating a matter of practice or procedure would generally be read as directory and in the present case, no prejudice has been shown by anyone as regards technical non-compliance of all the requirements of publication and accepted the contention on behalf of the resolution professional that Form G was published in all leading newspapers on 09.08.2020 and then, IBBI was also informed about technical issues in uploading the Form on the website.
c. Even if there had been any possibility of the resolution applicant incurring such a disqualification in terms of Section 164(2)(b) of the Companies Act, because of alleged default of another company, in which he is a director, to refund the share application money, the same would essentially be a matter of consideration of the registrar of companies. Unless a categorical finding was recorded in the competent forum as regards any such default and unless specific order disqualifying the resolution applicant as director because of such default came into existence, it could not have been taken by way of any process of assumption that the appellant-resolution applicant was disqualified to act as a director and thereby, was ineligible to submit a resolution plan.
d. when DIN status of the appellant was “active compliant”, he could not have been treated as ineligible.
e. The question of eligibility of the resolution applicant goes to the root of the matter but, we do agree with the other part of the submission in this regard that there is no concept of deemed disqualification under Section 164(2)(b) of the Companies Act.
f. Appellate Tribunal has rightly noticed that this filing of two EOIs by the resolution applicant, one for himself and another one on behalf of the ineligible trust has a material bearing on the competence of the resolution plan of the appellant, for being directly hit by Section 88 of the Trusts Act. The Appellate Tribunal has rightly held that the applicant-Mr. M.K. Rajagopalan, being the Managing Trustee of the said trust, cannot be permitted to act as its alter ego in implementing the resolution plan to gain financial advantage for himself.
g. Even if the appellant would assert that his financial capability was independent of trust money, the fact of the matter remains that he projected the overall picture of his own profile while also relying on his status as Managing Trustee of the said trust, Sri Balaji Vidyapeeth. Thus, any pecuniary advantage gained by him under the resolution plan in question would be directly subsumed by operation of Section 88 of the Trusts Act. This would, in all practical purposes, bring about a position that what could not be done directly for the said trust was sought to be done by the appellant by way of this indirect methodology.
h. The principles underlying the decisions of this Court respecting the commercial wisdom of CoC cannot be over-expanded to brush aside a significant shortcoming in the decision making of CoC when it had not duly taken note of the operation of any provision of law for the time being in force.
i. A direct conflict of interest being writ large on the face of the record, it cannot be said that the prohibition in terms of Section 166(4) does not operate and the resolution plan does not stand in contravention of any of the provisions of law for the time being in force. For this reason too, in our view, the appellant-resolution applicant could not have been accepted as eligible applicant.
j. Even when the findings of the Appellate Tribunal as regards valuation process and non-compliance of other procedural requirements have not been approved by us, a material factor which otherwise may appear to be of another procedural requirement, has its significant bearing and cannot be ignored as mere technicality. It is concerning want of presentation of finally revised plan to the committee of creditors before being presented to the Adjudicating Authority.
k. The commercial wisdom of CoC means a considered decision taken by CoC with reference to the commercial interests and the interest of revival of the corporate debtor and maximization of value of its assets. This wisdom is not a matter of rhetoric but is denoting a well-considered decision by the protagonist of CIRP i.e.,COC
l. Each and every aspect relating to the resolution plan, and more particularly its financial layout, has to be considered by the CoC before it could be said to have arrived at a considered decision. The fact that there had been a change in financial layout in the resolution plan in question is not a matter of dispute.
m. As to what decision CoC would have taken after examination of the revised plan, pursuant to its decision in the ninth meeting, cannot be a matter of guess or assumption that it was bound to be approved. As to which aspect would have arisen for consideration of CoC after revision of the plan is again a matter of uncertainty but it cannot be said that the conditional approval in the ninth CoC meeting was to be treated as fait accompli.
n. When the modified resolution plan, even if carrying minor modification/revision was not finally approved by CoC, its presentation to the Adjudicating Authority amounts to a material irregularity and this defect cannot be cured.
o. There is no and there cannot be any concept of post facto approval of any resolution plan by CoC which had not been placed before it prior to the filing before the Adjudicating Authority.
p. Moreover, in the tenth CoC meeting dated 15.06.2021, Agenda Item No. A1 only related to the updates of resolution professional where he, of course, stated about the plan having been revised and filed with NCLT on 04.02.2021. Such updates by resolution professional, even if taken note of by CoC, could hardly be considered as of approval by requisite majority of voting share in the CoC.
q. We would hasten to observe that the requirement of CIRP Regulations, particularly of placing the resolution plan in its final form before the CoC, has to be scrupulously complied with. No alteration or modification in the process could be countenanced. We say so for the specific reason concerning law that if the process as adopted in the present matter is approved, the very scheme of the Code and CIRP regulations would be left open-ended and would be capable of inviting arbitrariness at any level.
r. The irregularity in the process of approval by CoC and filing before Adjudicating Authority are not the matters of such formal nature that deviation in that regard could be ignored or condoned. As stated above, when commercial wisdom of CoC is assigned primacy, it presupposes a considered decision on the resolution plan in its final form.
s. It has rightly been argued on behalf of the appellants and had rightly been observed by the Adjudicating Authority (vide extraction in paragraph 15.4.1 hereinabove) that there was no provision in the Code which mandates that the related party should be paid in parity with the unrelated party. So long as the provisions of Code and CIRP Regulations are met, any proposition of differential payment to different class of creditors in the resolution plan is, ultimately, subject to the commercial wisdom of CoC and no fault can be attached to the resolution plan merely for not making the provisions for related party.
t. Appellate Tribunal has erred in holding that the settlement offer of the promoter in terms of Section 12-A was not placed for consideration of CoC. Approval of resolution plan in question could not have been reversed on this count.
Order Copy: