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The National Company Law Tribunal, Cuttack (“NCLT”), in the case of Trimex Industries Private Limited v. M/s. Sathavahana Ispat Limited and Others [I.A. No. 791/2021 in CP. (IB) No.179/HDB/2020], has held that a related party of the financial creditor is not barred under Section 29A of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to submit a resolution plan.

Facts

The Applicant is one among the Operational Creditors (“Applicant/OC”) of M/s. Sathavahana Ispat Limited (“Corporate Debtor/1st Respondent”). The petition for corporate insolvency resolution process (“CIRP”) was filed by M/s. Thirumal Logistics under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the IBC, against which the Corporate Debtor was admitted by the adjudicating authority.

The entire financial debt of the Corporate Debtor was assigned to JC Flowers Asset Reconstruction Private Limited (“2nd Respondent”) for a consideration, which was paid by it in two modes, namely, 15% by pledging security receipts to the primary and end-point allottee, namely, M/s. Siddeshwari Tradex Private Limited (“Siddeshwari”), via a trustee company, namely, M/s. Axis Trustee Services Limited, in respect of which a charge was created, and the balance 85% from private investors. Accordingly, the 2nd Respondent was the sole successor of the financial creditor of the Corporate Debtor, as well as, the sole member in the Committee of Creditors (“CoC”) of the Corporate Debtor.

The Resolution Professional (“RP”) issued an invitation for Expression of Interest (“EoI”). A provisional list was issued, wherein seven EoIs were submitted by different resolution applicants.

In the meantime, since the Corporate Debtor was a running concern, to cater to its repair and maintenance works, a request for proposal was issued by the interim RP. The works contract, with the approval from the CoC, was issued to the Prospective Resolution Applicant (“PRA”). Mr. Prithvi Raj Jindal, who is shareholder in Siddeshwari, and also a director and a key managerial person in the PRA.

Thus, it was contended that by awarding the works contract to the PRA, there existed a scheme of unitary collusion. In this situation, it was impossible for the CoC to act in a manner that exuded ‘commercial wisdom’ without allowing the betterment of the interests of Siddeshwari, and thereby the CoC polluted the possibility of a better outcome for the Corporate Debtor and for the other operational creditors.

Issue

Whether the CoC be restrained from considering the resolution plan of the PRA which has already been submitted by the Resolution Professional to the CoC.

Arguments

Contentions raised by the Applicant:

The Applicant had prayed to restrain the CoC from considering the resolution plan submitted to it by the PRA because the CoC and PRA are related parties. It was argued that the CoC, the PRA, Siddeshwari and M/s. Hexa Securities and Finance Company are all group companies, which have colluded with each other. The PRA was holding a key position in the latter two companies, and the said two companies funded the purchase by the CoC of the entire financial debts of the Corporate Debtor from its original financial creditors.

Thus, the PRA taking advantageous position held by the CoC as the sole successor of financial creditors and the member in the CoC of the Corporate Debtor, had submitted the resolution plan and further obtained the works contract for repairs and maintenance of the Corporate Debtor. Hence, the PRA played different roles, via its related parties, and dominated the entire CIRP against the interests of the other stakeholders of the Corporate Debtor.

It was also argued that the RP instead of proceeding with the resolution plans submitted by the other resolution applicants has considered the disputed plan of the PRA and kept silent without bothering about the delay and expiry of the resolution period. The RP failed to act in accordance with Regulation 39(1)(c) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“Regulations”) and further failed to gather the necessary information and records pertaining to the fact that the PRA is the sole person behind the CoC who has hijacked the entire CIRP.

The OC further argued that the RP failed to act diligently, and instead has acted in a biased manner causing prejudice to the rights of the other operational creditors and stakeholders of the Corporate Debtor.

Contentions raised by the Respondents and RP:

The Respondents contended that the application is pre-mature and devoid of any merit. Even before consideration by the CoC, the OC had made assumptions and was casting aspersions with the sole intent to delay the proceedings.

The RP contended that he acted as per the provisions of the IBC. The scheme of the IBC mandates the RP to function under the umbrella of the CoC, and hence the contention of the OC that the RP can proceed with other resolution plans, while leaving the PRA is neither within the ambit of the RP nor statutorily permitted.

It was also argued that Section 5(24) and proviso to Sections 21(2), 28(1)(f) and 29A of the IBC define related party only to the Corporate Debtor and restrain the RP to admit them into the CoC, and not to undertake any related party transactions without prior permission from the CoC and receipt of resolution plan, but there is no such restriction to related party in respect of the financial creditor. Hence, the RP acted in accordance with the provisions of IBC.

The RP, in accordance with Regulation 36A(10) of the Regulations, also issued the provisional list of resolution applicants to the OC and called for objections to exclude or include any resolution applicant named in the provisional list. This was never objected to by anyone, including the OC, and hence the OC is estopped from subsequently raising any objection.

The 2nd Respondent argued that it was assigned the financial debts of the Corporate Debtor by the consortium led by Canara Bank in a manner known to law, under Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, and the Reserve Bank of India (“RBI”) guidelines. The Applicant has no locus standi to question the validity of the said assignment in IBC proceedings. It is also unnecessary to the OC to know the source of the CoC to get the assignment, albeit the source of funding was furnished by it.

The relief to restrain the CoC from considering the resolution plan of the PRA amounts to restraining the CoC from carrying out its functions as provided in the IBC, and hence such a relief cannot be granted. The PRA argued that if the instant application was conceded, it would nullify the role of CoC under the IBC. The OC having missed the bus to raise any objection, when the RP called for them pursuant to issuance of the provisional list mentioning the resolution applicants, cannot now be permitted as an afterthought to file this instant application. The OC was also named in the final list of resolution applicants, which however was not considered after it failed to submit the resolution plan, evaluation matrix and information memorandum. Hence, this application was not filed with a bona fide intention, since the OC is attempting to avoid the competition indirectly, when it directly failed to qualify to be appointed as the prospective resolution applicant.

Further, all the transactions were carried out in a transparent manner and hence, the PRA is not disqualified in any manner.

Observations of the NCLT

The arguments of the Applicant were observed as unsustainable and rejected by the NCLT for the following reasons:

  • they are bereft of any tangible evidence, but only based on presumptions and apprehensions;
  • the mere fact that Mr. Prithvi Raj Jindal holds a key managerial position in Siddeshwari, which funded the assignment of the financial debts of the Corporate Debtor from the original financial creditors in favour of the CoC, does not substantiate the aforesaid allegations;
  • Siddeshwari has been duly constituted under the provisions of the Companies Act, 2013, and the debts were duly assigned in a duly conducted e–auction adopting the “swiss challenge” method;
  • the presumptions and apprehensions are beyond the ambit of this adjudicating authority under the IBC, or does not withstand legal scrutiny; and
    e. in accordance with Section 21 of the IBC, the CoC as the assignee of the original financial creditors is not a related party of Corporate Debtor.

The continuing nexus, if any, as argued by the OC that originated on the date of assignment of the financial debts up to the date of order admitting the Corporate Debtor into CIRP was observed as unsustainable and rejected by the NCLT for the following reasons:

  • any such alleged, presumed and apprehended nexus cannot be challenged by the OC before this adjudicating authority;
  • the quantum of consideration paid by the CoC towards the assignment and the mode of its payment also cannot be challenged before this adjudicating authority; and
  • the OC did not have the locus standi, which is conferred only upon its assignor, to question the validity of the assignment and genuineness thereof in a proceeding, before the competent authority.

Further, the NCLT stated that the proviso to section 30(5) of the IBC permits a financial creditor, who is also a member of the CoC, to submit a resolution plan. It further permits a resolution applicant to attend the meeting of the CoC and vote, if it is also a financial creditor, when its resolution plan is being considered. However, it was presumed and apprehended by the OC that in the instant case, there would be a failure to adhere to the aforesaid section due to conflict of interest since the CoC and PRA are one and the same and/or are related parties disabling the former to adhere to the regulations and enabling the latter to be a selector in the voting process. In view of the proviso to Section 30(5) of the IBC, it is only a figment of imagination by the OC to state that the related party of the financial creditor is prohibited from submitting the resolution plan, more particularly when it is not statutorily barred in Section 29A of the IBC. Hence, the allegation of collusion between the CoC and PRA on the only ground that they are related parties was observed as unsustainable by the NCLT.

Further, the argument that the present application was not premature, and was maintainable in the pre–voting stage was also observed as unsustainable and rejected by the NCLT for the following reasons:

  • patently, the application is filed only on the presumption and apprehension that CoC would approve the resolution plan submitted by the PRA and hence it was premature, and any application filed on future contingencies is unsustainable;
  • a mere contemplation or possibility that a right may be infringed without any legitimate basis, would not be sufficient to hold that the pleadings disclose a cause of action;
  • Section 30(2) of the IBC enables challenging before the adjudicating authority, the approval by the CoC of the resolution plan, if the specific requirements set out therein are complied with, and in the absence of any such compliance, there was no cause of action to grant the relief; and
  • the inherent and residuary powers conferred upon this Authority cannot supersede or nullify the specific provisions available in the IBC.

Further, IBC does not prohibit the related party to the financial creditor to submit the resolution plan, and if the prayer of the OC was granted then certain provisions of the IBC would become redundant. Section 30(2) entrusts upon the RP to examine each resolution plan and place them before the CoC for its consideration. Any interference by the adjudicating authority in this process amounts to injuncting the RP and CoC from functioning and discharging their duties and responsibilities as mandated under the IBC, which is neither envisaged therein nor under any law.

In the instant case, giving an opportunity to the CoC to consider the resolution plan submitted by the PRA would not in any manner, whatsoever, detract from the integrity of the IBC.

The NCLT also rejected the argument of the OC that in the event the resolution plan of the PRA is approved by the CoC, it will prejudice the stakeholders of the Corporate Debtor and it is against the principal of natural justice. The CoC is the sole successor of the financial debts and the OC and others are the operational creditors of the Corporate Debtor. The operational creditors do not have the ability to vote unless the Corporate Debtor has no financial creditors.

The NCLT stated that the OC, having failed to comply with certain formalities after being included in the provisional list of the prospective resolution applicants, is no more in the race in the CIRP of the Corporate Debtor. The provisional list was published and the OC was granted five days’ time to object upon the exclusion or inclusion of any resolution professional therein, but no objection was received either from the OC or anyone. Hence, the OC has no personal interest to claim injunction as a matter of right.

Decision of the NCLT

In view of the above observations, the NCLT held that the CoC cannot be restrained from considering the resolution plan of the PRA and the present application was dismissed.

VA View:

IBC offers protection to the interests of the operational creditors. In the instant case, the parties to the resolution process have followed the prescribed procedure. However, it was apparent that the endeavor of the OC is patently to circumvent the situation. When a statute requires a thing to be done in a particular manner, it must be done in that manner or not at all, as was observed in the case of Nazir Ahamed v. King Emperor [A.I.R. 1963 P.C. 253]. The OC having failed to object at the right time when called for in accordance with the IBC, filed the application bypassing the IBC under the guise of invoking the inherent powers of the adjudicating authority, which was neither encouraged nor allowed by the NCLT.

The NCLT’s decision re-interprets the contours of related party transactions under Section 29A of the IBC and settles the legal position that related parties of financial creditors are not barred from submitting a resolution plan under the IBC.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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