The National Company Law Tribunal, Kolkata (“NCLT”) has in its order dated February 17, 2022 (“Order”), in the matter of Anand Kariwala v. Partha Pratim Ghosh and Others [I.A. (IB) No. 20/KB/2021 in CP (IB) No. 533/KB/2018], held that a resolution plan cannot be rejected on a perceived grievance by a member of the suspended board who had not taken any positive steps to participate in the meetings of the Committee of Creditors (“CoC”).

Facts

On an application made by Jain Construction Private Limited (“Financial Creditor”), the NCLT by order dated October 24, 2019, initiated Corporate Insolvency Resolution Process (“CIRP”) against Kariwala Designers Private Limited (“Corporate Debtor”) and Mr. Chhedi Rajbir was appointed as the Interim Resolution Professional (“IRP”). A resolution plan was submitted by ARSK Consultants Private Limited and AMPI Finance Private Limited (“Resolution Plan”). ARSK Consultants Private Limited and AMPI Finance Private Limited are collectively referred to as “Resolution Applicant”.

Mr. Anand Kariwala, a member of the suspended board of directors of the Corporate Debtor (“Applicant”), received notices for the first, second and third CoC meetings. However, subsequent to the IRP’s replacement by Mr. Partha Pratim Ghosh (“Resolution Professional”), the Applicant did not receive notices for the CoC meetings.

Thereafter, in the month of September, 2020, the Applicant received a notice for handing over the vehicle of the Corporate Debtor. Only upon receiving such notice did the Applicant come to know that several CoC meetings were held and that he had not been given notice of the same. The Applicant, on enquiry, was informed of the Resolution Plan which was under consideration before the CoC. Upon perusal of the Resolution Plan, it came to the knowledge of the Applicant that the Corporate Debtor was being sold as a going concern at an undervalued price.

On that account, the Applicant has filed the present Interlocutory Application (“I.A.”) under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking to set aside the Resolution Plan proposed by the Resolution Applicant on the ground that the same is undervalued.

Issue

• Whether the Applicant has a locus standi to object against the approval of the Resolution Plan.
• Whether the adjudicating authority can interfere with the commercial wisdom of the CoC.

Arguments

Contentions raised by the Applicant:

Firstly, the Applicant submitted that he did not receive notices to the CoC meetings after IRP’s replacement by the Resolution Professional. Only upon receiving a notice to handover the vehicle of the Corporate Debtor, did he come to know that several CoC meetings were held in the interim. Further, on Resolution Professional’s refusal to share the Resolution Plan with the Applicant, the Applicant approached the NCLT for issuing a direction upon the Resolution Professional to serve the Resolution Plan upon the Applicant pursuant to which the Resolution Professional shared the Resolution Plan with the Applicant.

Upon perusal of the Resolution Plan, the Applicant observed that the Resolution Applicant had submitted a plan for INR 4,32,00,000/- (Indian Rupees Four Crores Thirty-Two Lacs only), whereas the sale of immovable property of the Corporate Debtor could alone fetch approximately INR 5,00,00,000/-. Therefore, by proposing to make a payment of INR 3,40,00,000/- to the sole Financial Creditor, the Resolution Applicant had ignored the very essence of the IBC and had thereby failed to (i) maximize the value of assets of the Corporate Debtor; and (ii) balance the interests of the stakeholders of the Corporate Debtor.

The Applicant, questioning the knowledge and experience of the Resolution Applicant, further contended that the Resolution Plan is faulty and biased depriving creditors other than the secured Financial Creditor of their dues.

Lastly, the Applicant contended that the Resolution Plan is being submitted in order to hand over the Corporate Debtor to Mr. Sanjay Kariwala, who claims to be the 100% shareholder of the Corporate Debtor and that a petition under Sections 240-241 of the Companies Act, 2013 is pending in respect thereof.

Contentions raised by the Resolution Professional:

The Resolution Professional submitted that the Applicant was informed of the appointment of the Resolution Professional on his registered e-mail address, which was in fact the e-mail address of his son Mr. Sharad Kariwala.

Mr. Sharad Kariwala, not being a member of the suspended board of directors was not permitted to attend the other CoC meetings. Moreover, notices of the CoC meetings were circulated to all the suspended board of directors and notice had also been sent to registered e-mail address of the Corporate Debtor. Further, the Resolution Plan was shared with the Applicant after the Applicant submitted the Non-Disclosure Agreement.

The Resolution Professional further submitted that immovable properties, moveable properties and financial assets of the Corporate Debtor were separately valued by two registered valuers and the average of the two valuations was considered as the fair value/liquidation value.

The Resolution Professional denied the contention of the Applicant that the Resolution Plan was faulty or biased and declared that the interests of all the stakeholders of the Corporate Debtor had been considered. The Resolution Professional further denied that the CIRP had been conducted in a fraudulent manner or in order to transfer the business of the Corporate Debtor from the present promoters to a group controlled by Mr. Sanjay Kariwala.

Contentions raised by the CoC:

The CoC submitted that the Applicant had no locus standi to file the I.A. The CoC further contended that its commercial wisdom cannot be questioned by the Applicant, who is a member of the suspended board of directors of the Corporate Debtor.

It was further submitted that the Applicant has filed the present I.A. owing to disputes and differences between the members of the suspended board of directors of the Corporate Debtor and that the I.A. has been filed with the malafide intention of driving the Resolution Applicant away in order to direct the Corporate Debtor into liquidation. Moreover, the Applicant chose not to appear in the meetings of the CoC on his own account, despite receiving notices of the same.

With regard to the contention of the Applicant that the Resolution Applicant does not have any prior knowledge or experience in the line of business of the Corporate Debtor, the CoC submitted that the Corporate Debtor is merely into trading and retailing of sarees, which is not considered to entail skills requiring high level of technical or business expertise.

Lastly, reliance was placed by the CoC on the judgment of the Hon’ble Supreme Court in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others [(2020) 8 SCC 531], submitting that the commercial wisdom of the CoC in approving the Resolution Plan cannot be challenged by the Applicant or any other person.

Observations of the NCLT

The NCLT observed that once the Corporate Debtor has been admitted into CIRP, the board of directors of the Corporate Debtor is suspended and its powers are transferred to the IRP as envisaged in Section 17(1)(b) of the IBC. The function of the suspended board of directors is limited to assisting and cooperating with the IRP/Resolution Professional for the smooth resolution of the Corporate Debtor. However, the suspended board of directors is not barred from objecting the act of the Resolution Professional, if such act is prejudicial to the Corporate Debtor, or is in violation of any law or procedural requirement.

The NCLT, relying on a catena of judgments of the Hon’ble Supreme Court, reiterated that the adjudicating authority is to refrain from intervening with the commercial wisdom of the CoC. The adjudicating authority is bound to act within the four corners of Section 30(2) of the IBC. In NCLT’s view, the Resolution Plan submitted by the Resolution Applicant was in compliance with Section 30(2) of the IBC and was consequently approved by the NCLT.

With respect to the objection of the Applicant that the Resolution Plan does not maximize the assets of the Corporate Debtor, thus violating the object of the IBC, the NCLT observed that the Applicant had failed to consider that the primary objective of the IBC is not only to maximize the assets of the Corporate Debtor, but also to give the Corporate Debtor a new lease of life.

The NCLT further observed that, the Hon’ble Supreme Court in its judgment in Ebix Singapore (P) Ltd. v. Committee of Creditors of Educomp Solutions Limited [2021 SCC OnLine SC 707], held that inordinate delays cause commercial uncertainty, degradation in the value of the corporate debtor and makes the insolvency process inefficient and expensive.

Decision of the NCLT

The NCLT, in furtherance of its aforementioned observations, dismissed the Applicant’s I.A. and held that the Resolution Plan has been submitted to revive the Corporate Debtor as a going concern and is in compliance with Section 30(2) of the IBC. Therefore, a Resolution Plan cannot be rejected based on a perceived grievance by a member of the suspended board of the Corporate Debtor who has not taken any positive steps to participate in the meetings of the CoC.

VA View:

The NCLT correctly observed that upon admission of the Corporate Debtor into CIRP, the IRP/Resolution Professional is in the driver’s seat for directing the CIRP and takes over the reins of the Corporate Debtor to manage the Corporate Debtor for its benefit. Although initiation of CIRP against the Corporate Debtor does not bar the suspended board of directors from objecting to the acts of the Resolution Professional (if such acts are prejudicial to the interests of the Corporate Debtor or is in violation of any law or procedural requirement), a resolution plan cannot be rejected merely on a perceived grievance by a member of the suspended board of the Corporate Debtor who failed to take steps to participate in the meetings of the CoC.

Further, the NCLT’s reasoning emphasized that the process of CIRP should be construed as a primary mechanism for corporate rescue and not the first step towards corporate death. That is to say that, liquidation followed by dissolution is supposed to be the last resort and should only take effect if CIRP fails.

The NCLT through this Order reinforced the supremacy of the financial creditors and their commercial wisdom, so far as the feasibility and viability of the Resolution Plan is concerned. Therefore, time being the essence of resolution process, the commercial wisdom of the CoC has yet again been given paramount status with limited judicial intervention.

For more information please write to Mr. Bomi Daruwala at [email protected]

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