Between the Lines | Supreme Court: Interest free term loans advanced to a corporate person are not excluded from the purview of a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016

The Hon’ble Supreme Court (“SC”) has in its judgment dated July 26, 2021, in the matter of Orator Marketing Private Limited v. Samtex Desinz Private Limited [Civil Appeal No. 2231 of 2021] (“Judgement”) held that the definition of financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) does not exclude an interest free loan and that it would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.

Facts

M/s Sameer Sales Private Limited (“Original Lender”), advanced a term loan of INR 1.60 crores to M/s Samtex Desinz Private Limited (“Corporate Debtor”) for a period of two years in order to enable the Corporate Debtor to meet its working capital requirements. Thereafter, the Original Lender assigned the outstanding loan to M/s Orator Marketing Private Limited (“Appellant”). As per the loan agreement, the loan was due and payable on February 1, 2020. According to the Appellant, the Corporate Debtor made some payments, however, INR 1.56 crores remained outstanding.

The Appellant filed an application under Section 7 of the IBC before the National Company Law Tribunal, New Delhi (“NCLT”) seeking the initiation of the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. The NCLT rejected the application of the Appellant on the ground that the Appellant had extended an interest free loan and had failed to prove that the loan was disbursed against consideration of time value of money. Thereafter, the National Company Law Appellate Tribunal, New Delhi (“NCLAT”), upheld the order of the NCLT on the aforementioned ground that since the money borrowed is not against payment of interest, it could not be termed as a financial debt under Section 5(8) of the IBC.

Being aggrieved by the order of the NCLAT, the Appellant filed the present appeal before the SC under Section 62 of the IBC.

Issue

Whether a person who extends a term loan to a corporate person free of interest, for its working capital requirements is not a financial creditor and therefore, incompetent to initiate CIRP under Section 7 of the IBC.

Arguments

Contentions raised by Appellant:

It was the submission of the Appellant that since even after a period of two years, the loan still remained due, it must be thereafter treated as a financial debt. The Appellant relied on the judgment of the NCLAT in the matter of Mack Soft Tech Private Limited v. Quinn Logistics India Limited [ Company Appeal (AT) (Ins) No.143 of 2017], to submit that when there is disbursement and default, it should be construed as a financial debt. It was further contended that after the execution of the assignment agreement in its favour, the Appellant, not being a related party and having taken the assignment for consideration, the loan extended would be a financial debt.

Observations of the Supreme Court

The SC observed that the definition of financial debt under Section 5(8) of the IBC was misconstrued by both the NCLAT and the NCLT by reading the same in isolation and out of context and hence the judgment and order of the NCLAT affirming the order of the NCLT was patently flawed.

It was further noted that, in a plethora of judgments, it has been observed that while construing and/or interpreting any statutory provision, the legislative intent of the statute must be looked at and that each word, phrase or sentence has to be construed in light of the general purpose of the act itself. Therefore, when the meaning of a certain provision in a statute is to be construed, the statue has to be read as a whole; the previous state of the law, the general scope and ambit of the statute and the mischief that it was intended to remedy, would all be relevant factors.

The SC relied on its judgment in Pioneer Urban Land and Infrastructure Limited v. Union of India [4 (2019) 8 SCC 416], where numerous previous judgments including Innoventive Industries Limited v. ICICI Bank Limited [2 (2018) 1 SCC 407] and Swiss Ribbons Private Limited and Another v. Union of India and Others [3 (2019) 4 SCC 17] were referred to and held that even individuals who were debenture holders could be financial creditors who could initiate CIRP.

The SC further observed that the definition of financial debt under Section 5(8) of the IBC cannot be read in isolation, without considering other relevant definitions, particularly, the definition of ‘claim’ in Section 3(6), ‘corporate debtor’ in Section 3(8), ‘creditor’ in Section 3(10), ‘debt’ in Section 3(11), ‘default’ in Section 3(12) and ‘financial creditor’ in Section 5(7) along with Sections 6 and 7 of the IBC. In order to arrive at its decision, the SC relied on the definition of financial debt in Section 5(8) of the IBC which provides that “a debt along with interest if any which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest, as per Section 5 (8) (a) of the IBC” and observed that the NCLT and the NCLAT have overlooked the words “if any” which could not have been intended to be otiose. ‘Financial debt’ would mean outstanding principal due in respect of a loan and would also include interest thereon, if any . In the event that there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Therefore, both the NCLAT and the NCLT failed to notice Clause (f) of Section 5(8) of the IBC, in terms whereof a financial debt includes any amount raised under any other transaction, having the commercial effect of borrowing.

Additionally, it was observed that sub-clauses (a) to (i) of Section 5(8) of the IBC are illustrative and not exhaustive. It was noted that the legislature has the power to define a word in a statute and that such definition may be restrictive or extensive but when the word is defined to include something, then such definition is prima facie extensive. While making the aforesaid observation, the SC referred to its judgment in State of Bombay v. Hospital Mazdoor Sabha and Others [6 AIR 1960 SC 610], wherein it was held that “It is obvious that the words used in an inclusive definition denote extension and cannot be treated as restricted. Where we are dealing with an inclusive interpretation, it would be inappropriate to put a restrictive interpretation upon words of wider denotation.”

Lastly, the SC noted that, taking into account the aims, objectives and scheme of the IBC, there is no discernible reason as to why a term loan to meet the financial requirements of the Corporate Debtor for its operation, which obviously has the commercial effect of borrowing, should be excluded from the purview of financial debt. It was further observed that the trigger for initiation of CIRP by a financial creditor under Section 7 of the IBC is the occurrence of default by the corporate debtor and default includes financial debt and operational debt. Further, the definition of debt is also expansive and it includes, inter alia, financial debt. Therefore, since, the definition of financial debt under Section 5(8) of the IBC does not exclude an interest free loan, it would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.

Decision of the Supreme Court

In view of the above, the SC allowed the appeal and set aside the orders of the NCLT and the NCLAT which dismissed the petition of the Appellant under Section 7 of the IBC. It was also directed that the petition filed by the Appellant under Section 7 of the IBC before the NCLT would stand revived and is to be considered afresh in accordance with the law and findings in the present Judgement.

VA View:

Since the commencement of the IBC, it has been observed consistently that a debt would require the elements of ‘debt along with interest’ or ‘time value of money’ to qualify as a financial debt under Section 5(8) of the IBC. The SC observed that the orders of the NCLT and the NCLAT were patently flawed having misconstrued the definition of ‘financial debt’ by reading the definition in isolation and out of context. The SC further clarified that a term loan meeting the financial requirements of a Corporate Debtor for its operation has the commercial effect of borrowing, and hence should not be excluded from the purview of a financial debt.

The SC in this Judgement, giving regard to the aim, objective and scheme of the IBC has rightly clarified that clauses (a) to (i) of the said Section are not exhaustive and it is to be construed to include an interest free loan. The SC held that the definition of ‘financial debt’ cannot be read in isolation, without taking into consideration other relevant definitions of the IBC as the statute has to be read as a whole.

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

Between the Lines | NCLAT: Withdrawal of corporate insolvency resolution process proceedings filed against the corporate debtor allowed, prior to the constitution of the committee of creditors.

The National Company Law Appellate Tribunal, New Delhi (“NCLAT”) has in its judgment dated July 07, 2021 (“Judgement”), in the matter of Anuj Tejpal v. Rakesh Yadav and Another [I.A. No. 815 of 2021 in Company Appeal (AT) (Insolvency) No. 298 of 2021], allowed withdrawal of corporate insolvency resolution process (“CIRP”) proceedings filed against the Corporate Debtor (defined below) prior to the constitution of the committee of creditors (“CoC”). The NCLAT further held that, in the interest of justice, the inherent powers can be exercised by both National Company Law Tribunal (“NCLT”) and NCLAT, who may allow or disallow the application of withdrawal keeping in view the interest of the concerned parties and the facts of each case.

Facts

Mr. Anuj Tejpal (“Appellant”), an erstwhile ‘Director’ of ‘OYO Hotels and Homes Private Limited’ (“Corporate Debtor”) preferred the instant appeal (“Appeal”), under Rule 11 (Inherent Powers) of the National Company Law Appellate Tribunal Rules, 2016 (“NCLAT Rules”). The Appeal was filed against the order of NCLT dated March 30, 2021 (“Impugned Order”) in view of an amicable settlement arrived at between the concerned parties. The NCLT by virtue of the Impugned Order had admitted the application, filed under Section 9 of the IBC, for initiation of CIRP against the Corporate Debtor and not ‘Mypreferred Transformation and Hospitality Private Limited’ (“MTH”), the sister concern of the Corporate Debtor being a distinct legal entity.

The Corporate Debtor (erstwhile Alcott Town Planners Private Limited) had executed a ‘Management Services Agreement’ dated November 16, 2018 (“MSA”) with Mr. Rakesh Yadav, the respondent no. 1 herein (“Operational Creditor”), to manage and operate ‘Hotel Yellow White Residency’ for which the Operational Creditor had received as security deposit INR 13,50,000 in addition, to an investment of INR 14,25,098/- as capital expenditure, made by the Corporate Debtor. During the subsistence of MSA, all rights and liabilities were transferred to MTH, with effect from June 01, 2019. MTH revised the MSA on July 17, 2019 wherein the benchmark revenue payable to the Operational Creditor was modified. MTH had made the payments as per modified commercial terms. Thereafter, the Operational Creditor issued demand notices under Section 8 of the IBC, for default in payment, dated September 13, 2019, pertaining to the period of July 2019 to September 2019 amounting to INR 7,02,000/- and another demand notice dated November 11, 2019 for the period pertaining to July 2019 to November 2019 amounting to INR 16,02,000/-(“Demand Notices”). It was stated that, the Demand Notices were incorrectly addressed to the Corporate Debtor, when all the rights and obligations under MSA were vested with MTH.

The NCLAT by an order dated April 08, 2021, issued a notice and suspended the constitution of the CoC of the Corporate Debtor, based on the submission that, the Operational Creditor had wrongly proceeded against the Corporate Debtor instead of MTH, and that, MTH had already paid all the amounts claimed by the Operational Creditor. It had also been submitted that, all efforts would be made to reach an amicable settlement with the Operational Creditor under Section 12-A (Withdrawal of application admitted under Sections 7, 9 or 10) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Subsequently, the Operational Creditor had issued a letter dated April 23, 2021 to the effect that, all disputes, claims and counter claims of the Operational Creditor qua both the Corporate Debtor as well as MTH stood settled to the full satisfaction of the parties. It was also submitted that, the interim resolution professional (“IRP”) had received the payment towards the total expenses incurred by him and there was no further amount outstanding in this regard.

During the pendency of the Appeal, certain intervention applications were filed by a few intervenors including ‘Federation of Hotel and Restaurant Associations of India’ among others with regard to their respective claims.

Issue

• Whether NCLAT can exercise its inherent powers under Rule 11 of NCLAT Rules to allow withdrawal of CIRP proceedings, prior to constitution of CoC of the Corporate Debtor.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that, since the settlement was arrived at prior to the constitution of the CoC, the question of applicability of Section 12-A of the IBC did not arise in this case. This was not an application under Section 12-A of the IBC and therefore Regulation 30-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) and the procedure thereunder was not applicable to the facts of this case. Further that, NCLAT had exercised its inherent power under Rule 11 of NCLAT Rules in several precedents and therefore it could not be said that only NCLT had the inherent powers under Rule 11 of NCLT Rules, 2016 (“NCLT Rules”).

The Appellant further contended that the intervention applications were not maintainable at this stage of Appeal due to the settlement arrived at between the parties. Further that the intervention applications were contrary to the settled principles of law laid down in Swiss Ribbons Private Limited and Others. v. Union of India and Others [(2019) 4 SCC 17], among others that the scope of the IBC is meant for ‘revival’ of the Corporate Debtor. Further that, the proposed intervenors were not allowed to contest the merit of the Appeal or contest the settlement of the subject dispute as proceedings under the IBC were not debt recovery proceedings. The proposed intervenors could come into existence only on the constitution of CoC as per the provisions of the IBC and till then they had no locus standi to object a settlement. Further that, Section 14 of the IBC bars the filing of any application against the Corporate Debtor under Sections 7 and 9 of the IBC during the moratorium period and that the proposed intervenors had not placed any documents on record to substantiate any ‘debt’ or ‘default’. Therefore, in view of the settlement between the Operational Creditor and MTH, no other purported claimant could object to the setting aside of the CIRP against the Corporate Debtor.

The Appellant submitted that, great prejudice would be caused to the Corporate Debtor in view of the subsistence of the CIRP proceedings despite having settled the matter with Operational Creditor. Further that the CIRP proceedings would lead to loss of goodwill and reputation, loss of perspective investments and serious administrative difficulties in collection of revenue from the existing partners, disbursement of payments to dependent hotel owners, vendors and employees.

Observations of the NCLAT
The NCLAT noted that, Section 12-A of the IBC refers to a situation which is post constitution of CoC, whereas Regulation 30-A(1)(a) of CIRP Regulations deals with procedure to be followed before the constitution of CoC. The NCLAT noted that Regulation 30-A of the CIRP Regulations was amended with effective from July 25, 2019, and reads as mentioned below:

“1. An application for withdrawal under section 12A may be made to the Adjudicating Authority –

• before the constitution of the committee, by the applicant through the interim resolution professional”.

Further that, Section 12-A of IBC read together with amended Regulation 30-A of the CIRP Regulations provided that stage of pre-constitution of CoC would be covered under the Regulation 30-A(1)(a) of the CIRP Regulations.

The NCLAT further also referred to Rule 11 of NCLAT Rules, which provides that, “Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal.”

The NCLAT observed that in the judgment in Jogender Kumar Arora v. Dharmendar Sharma and Others [Company Appeal (AT) (Insolvency) No. 94, 95 of 2019] it was held that, the NCLAT had inherent powers under NCLAT Rules to decide on an application for withdrawal of CIRP, taking into consideration that, before the constitution of CoC, the Corporate Debtor and Operational Creditor had settled their dues amicably. The NCLAT noted that in a catena of judgements it was observed that, the NCLAT and the NCLT had consistently exercised inherent powers conferred upon them to allow withdrawal, on a case-to-case basis in view of the settlement reached prior to formation of a NCLAT relied extensively on the observations made in Swiss Ribbons (supra) wherein it was noted that, once IBC gets triggered on admission of a petition filed by a creditor(s), by the NCLT, the proceeding before the NCLT, being a collective proceeding, would be a proceeding in rem. Therefore, at any stage where the CoC would not have been constituted, a party could approach and consult NCLT directly, which may, in exercise of its inherent powers under Rule 11 of NCLT Rules, allow or disallow an application for withdrawal or settlement which will be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case. NCLAT noted that, in the case of Brilliant Alloys Private Limited v. Mr. S. Rajagopal and Others [SLP (Civil) No. 31557/2018], it was clarified that Regulation 30-A is not mandatory but is directory for the simple reason that on the facts of a given case, an application for withdrawal may be allowed in exceptional cases even after issuing the invitation for expression of interest under Regulation 36-A. Further the NCLAT rejected the contention that the application for withdrawal, filed, prior to constitution of CoC ought to be mandatorily dealt with the provisions under the Regulation 30-A(1)(a) of CIRP Regulations.

The NCLAT further observed that it is a well-settled proposition of law that, substantive law takes precedence over a regulation and Section 12-A of the IBC clearly refers to the withdrawal of an application under Sections 7, 9 or 10 of the IBC after the constitution of the CoC. The NCLAT noted that, the main thrust against the provision of Section 12-A is the fact that 90% of a CoC would have to allow withdrawal. The withdrawal shall be a consequence of all financial creditors contemplating and deciding together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into with a corporate debtor.

The NCLAT noted with regard to the intervenors applications that it was not the case of the intervenors that demand notices under Section 8 of the IBC were pending. Rather their contention was that, the Corporate Debtor owed them certain monies/dues. The NCLAT observed that, before constitution of CoC, mere filing of a ‘Claim’ did not constitute default per se. It was only on the basis of the ‘Claims’ that the CoC was constituted. The NCLAT observed that the prime objective of the IBC is not recovery, but revival of the Corporate Debtor. Further that, after admission of petition under IBC, the NCLT, on a case to case basis can exercise its inherent power under Rule 11 of the NCLT Rules for withdrawal of CIRP, if parties are interested to amicably settle the matter prior to constitution of CoC.

The NCLAT noted that, the communication filed by the Operational Creditor evidenced that all amounts due and payable by the Corporate Debtor, had been paid in full and final satisfaction. The NCLAT proceeded to reiterate that, in the interest of justice, the inherent powers could be exercised by both NCLT and NCLAT and consequentially, they may allow or disallow the application of withdrawal keeping in view the interest of the concerned parties and the facts of each case.

Decision of the NCLAT

The NCLAT proceeded to hold that, in the interest of justice it would exercise the inherent powers and allow withdrawal of CIRP application against the Corporate Debtor in view the interest of the concerned parties. The NCLAT noted that, Regulation 30-A(1)(a) was not applicable to the present case.

The NCLAT allowed the Appeal and set aside the Impugned Order, thereby consequentially also set aside appointment of IRP, moratorium against Corporate Debtor, etc. The NCLAT further directed that, the Corporate Debtor was released from all the rigours of law and is allowed to function independently through its board of directors with immediate effect.

The intervenor applications filed during the pendency of the Appeal, were dismissed. The NCLAT further held that, the intervenors were free to seek legal remedies available under IBC by filing separate application for admission of CIRP at any stage and that NCLT shall hear the matter, uninfluenced by this Judgement, if any, on merits and proceed in accordance with law.

VA View:

The NCLAT in this Judgement held that Regulation 30A of the CIRP Regulations was not applicable to the instant Appeal. The NCLAT rightly observed that an appeal before NCLAT is essentially a continuation of the original proceeding. Hence a change in law can always be applied in an original or appellate proceeding. The NCLAT noted that IBC envisages the said principle more particularly on account of Section 32 of the IBC which provides that any appeal from an order approving the resolution plan shall be in the manner and on the grounds specified in Section 61(3) of the IBC. The NCLAT held that its inherent powers were sufficient for allowing the withdrawal of CIRP proceedings.

The NCLAT also considered the effect of the pandemic on the ‘Hospitality and Tourism Industry’ and noted that creditors were free to move an application before the NCLT or they could alternatively approach the Corporate Debtor and reach an amicable settlement for the same.

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

Between the Lines | NCLAT: The commercial wisdom of the committee of creditors is paramount and could not be interfered with.

The National Company Appellate Law Tribunal (“NCLAT”) by order dated May 05, 2021, in the matter of Ramasamy Palaniappan v. Radhakrishnan Dharmarajan and Others [Company Appeal (AT) (CH) (Ins.) No. 19 of 2021] with Chandrasekaran v. Radhakrishnan Dharmarajan and Others [Company Appeal (AT) (CH) (Ins.) No. 20 of 2021] held that, commercial wisdom of the committee of creditors is paramount and could not be interfered with and thereby upheld the order passed by the NCLT, Chennai bench (“NCLT”) dated December 23, 2020 in IA No. 1001 of 2020 in IBA/1459/2019 (“NCLT Order”).

Facts

The NCLT had admitted the petition and the corporate insolvency resolution process (“CIRP”) had been initiated against the respondent no. 3 herein, M/s Appu Hotels Limited (“Corporate Debtor”) by virtue of the NCLT Order. Consequently, Mr. Mukesh Gupta was appointed as interim resolution professional (“IRP”). The IRP made a public announcement on May 08, 2020 and therein the last date for submission of claims was stated as May 21, 2020.

Meanwhile, the suspended director of the Corporate Debtor filed a petition before Madras High Court (“MHC”) challenging the NCLT Order. By an order dated May 20, 2020, the MHC stayed the constitution of the committee of creditors (“CoC”) by three weeks, that is, till June 10, 2020.

Subsequently, on September 04, 2020, the CoC appointed Mr. Radhakrishnan Dharmarajan as the Resolution Professional (“RP”). During the CIRP, due to lockdowns imposed as a result of the Covid-19 pandemic (“Pandemic”), certain activities under CIRP could not be completed. Moreover, the statutory time period of 180 days was to terminate on November 04, 2020. Thereafter, in one of its meetings on November 12, 2020, the CoC passed a resolution with 100% voting to seek an extension of the CIRP period by excluding 179 days (May 05, 2020 to October 31, 2020) from the CIRP period.

The NCLT considering the situation of the Pandemic had allowed an application filed by the RP, under Section 12(2) (time limit for completion of insolvency resolution process), of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Thereby, NCLT allowed the exclusion of such period (May 05, 2020 till October 31, 2020) from the ambit of CIRP to provide benefit available therein in terms of Section 12(2) of IBC, and under Regulation 40 C(special provision relating to time-line) under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016 (“Regulation 40 C”). This NCLT Order was challenged by Mr. Ramasamy Palaniappan, an equity shareholder of the Corporate Debtor and Mr. Chandrasekaran (“Appellants”) before the NCLAT.

Issue

• Whether the RP had committed a categorical violation of Regulation 40 C by not considering the interests of all stakeholders.

Arguments

Contentions of the Appellants:

The Appellants submitted that, the NCLT had invoked the power under Regulation 40 C, and granted a mechanical extension of 179 days from the CIRP period without complete exclusion of the timelines and the activities undertaken during the lockdown period. This would have helped render considerable benefit to all the stakeholders. The petition filed by the financial creditor (respondent no. 2 herein), was admitted by the NCLT during the lockdown period by virtue of the NCLT Order. Subsequently, the IRP was appointed who then invited claims, constituted the CoC and conducted a few meetings of the CoC between June 22, 2020 and October 12, 2020. Thereafter ‘Form G’ (invitation for expression of interest) was issued, and thereby expression of interest was submitted by bidders. There were multiple issues raised, firstly CoC had raised an issue about the value of the resolution plan was far below the liquidation value and secondly, due to the lockdown situation many interested applicants were unable to submit their expression of interest and that it would have been commercially prudent to grant additional time.

The Appellants submitted that, the RP committed violation of Regulation 40 C, by not considering interests of stakeholders and merely sought exclusion of time to complete formalities. The RP had not considered the interests of the Corporate Debtor to be a going concern. The RP should have sought complete exclusion of the timeline and the activities undertaken during the excluded period to render a considerable benefit to all the stakeholders. Regulation 40 C, had been introduced for a much bigger purpose which would be for the benefit of the Corporate Debtor, and the stakeholders of the Corporate Debtor.

The NCLT had extended the CIRP timeline under Section 12(2) of the IBC and not by application under Regulation 40 C (which was fundamentally different from the extension provided under the IBC since the former was to protect the interests of all the stakeholders) and hence, it was mandatory to consider the same before granting exclusion. Further, Section 12(2) of the IBC only permitted 90-days extension, whereas Regulation 40 C qualified for excluding the entire period of inactivity.

Moreover, the RP did not attempt to safeguard the valuable assets of the Corporate Debtor and had presented the plan of the resolution applicant, which took care of just the minimum requirement as prescribed under the IBC, by paying back only the financial, secured, unsecured and operational creditors. The members of the CoC had also felt that the resolution plan amount was far lower than the liquidation value of the Corporate Debtor and hence had even suggested re-invitation of expression of interest and the re-issuance of ‘Form G’. The RP, however, did not take any steps to obtain a better offer and mindlessly proceeded ahead with the CIRP formalities. The RP had acted entirely against the object of the IBC, which was enhancement of entrepreneurship and maximization of value of the Corporate Debtor’s assets while balancing the interests of all stakeholders. Thirdly, there was an entire halt in economic activities during the Pandemic. The RP had not taken into account that the said period could not be conducive to carrying out vital activities such as valuation of the Corporate Debtor and preparation of information memorandum to seek potential resolution applicants to offer their bid.

Contention raised by the RP and the Corporate Debtor:

Regulation 40 C was an enabling provision that allowed the RP to seek approval of the NCLT for exclusion, if any, of the activities which could not be completed due to the lockdown. It was not the case before the NCLT that no process could be initiated during the lockdown period. On the other hand, some of the activities which could not be completed, warranted an exclusion. The NCLT was satisfied with the material evidence placed before it and concluded that such exclusion was required. The grant of time by the NCLT, therefore, could not be made the subject matter of an appeal. The Appellant was questioning the NCLT Order, which had been made based on an application filed with the requisite approval of CoC. It was contended that the entire CIRP had been conducted as per the procedure under IBC. The Appellant who was holding some equity shares in the Corporate Debtor had filed the appeal only to delay the CIRP and to bring about a halt to the approval of the resolution plan. Further, the CoC had approved the resolution plan with a majority of 87.34%, which was now pending consideration of the NCLT.

Observation of NCLAT

The NCLAT noted that the appeal had been filed inter alia on the ground that the RP had violated Regulation 40 C by not considering the interests of all stakeholders and was merely seeking exclusion of time to complete the formalities in the capacity of an RP. It was observed that, the valuation of the Corporate Debtor being INR 1600 crores was unsupported by any evidence. However, the resolution plan amount had been arrived after following the procedure under the IBC. In the case of Maharashtra Seamless Limited. v. Padmanabhan Venkatesh, [(2020) 11 SCC 467] the Supreme Court (“SC”) held that, so long the resolution plan met the other requirements of Section 30(2) of the IBC and was approved by the ‘committee of creditors’, judicial review of such decision of was not permitted. The resolution of the CoC to seek exclusion of time from CIRP was a commercial decision that could not be questioned before the NCLT or the NCLAT.

Considering the contention of the Appellant in respect of Regulation 40 C, it was noted by NCLAT that, the said regulation had been introduced to meet the eventualities of the Pandemic. It was stated that the period of lockdown imposed by the central government in the wake of the Pandemic shall not be counted for the timeline for any activity that could not be completed due to such lockdown about a CIRP. The RP, in this case, had conducted the CIRP in the timeline as per the provisions of the IBC, and when required, had invoked Regulation 40 C. It excluded the timeline for the activities that could not be performed due to the lockdown during the CIRP. Per contra, the activities performed and completed during the lockdown in a given timeline could not be invalidated on account of Regulation 40 C. Moreover, on perusal of the minutes of meeting of the CoC held on November 12, 2020, it appeared that the RP had apprised the CoC about the legal options available – that is, (i) to seek an extension of the timeline for submission of resolution plan or (ii) to make the decision for publication of fresh ‘Form-G’. It was the CoC’s commercial decision that, “no extension of time for submission of Resolution Plan should be done and RP was directed to expedite the valuation process and check the feasibility and viability of the Resolution Plan already submitted and present the eligible Resolution Plan before the CoC for consideration.”

The NCLAT noted that the SC had already laid down in the case of K. Sashidhar v. Indian Overseas Bank and Others [(2019) 12 SCC 150] that the commercial wisdom of CoC was paramount and that judicial intervention was not permitted. Therefore, the decision of the CoC to not seek extension of the timeline for submission of resolution plan was a commercial decision, which was not justiciable.

The NCLAT observed that, the Appellant, moreover, was not a necessary party and the NCLT on being satisfied with the reasons adduced by the RP and material evidence placed before it had granted an exclusion. The NCLAT observed that, the allegation that the CIRP had been conducted in undue haste during the lockdown could not be a ground for the Appellant to challenge the NCLT Order, merely because Regulation 40 C was introduced. Further the contention that, introduction of Regulation 40 C would make it imperative for the RP to invoke it for extending the timeline as a matter of routine was incorrect.

The NCLAT further observed that, the RP had conducted the CIRP as per timelines. When required, the RP had invoked Regulation 40 C and sought exclusion of 179 days while calculating the CIRP period. In addition, it was also noted that Section 12(2) of the IBC empowered the NCLT to extend the timeline for completion of CIRP beyond 180 days on the basis of the resolution of the CoC which is passed with a minimum 66% of voting share. The second proviso to Section 12(3) of the IBC further empowered the NCLT to extend the timeline for completion of CIRP up to 330 days. The SC’s decision in Kalpraj Dharamshi v. Kotak Investment Advisors Limited [2021 SCC Online SC 204] was also considered, herein, the SC had held that commercial wisdom of CoC was not to be interfered with, excepting the limited scope as provided under Sections 30 and 31 of the IBC. In this case, the SC had also noted that though there had been material irregularity in exercise of powers by RP, all actions of the RP have the seal of approval of the CoC.

Decision of NCLAT

In this case, even though Regulation 40 C could have been applied for exclusion of 179 days on account of the unprecedented situation created by the Pandemic and some of the financial creditors had opined for fresh publication of ‘Form G’ for the invitation of expression of interest, the CoC had unanimously decided only for seeking exclusion of 179 days, that is from May 05, 2020 to October 31, 2020, for completion of CIRP. The CoC, also, under its commercial wisdom, did not prefer for publication of ‘Form-G’ afresh to invite an expression of interest. Therefore, it was held that, such a decision of the CoC was not justiciable, and the decision of the NCLT warranted no interference.

VA View:

The NCLAT reiterated that the commercial wisdom of the CoC has to be given paramountcy and could not be interfered with. It has been recognized by the SC that the CoC acts on the basis of thorough assessment and examination of the resolution plan. To intervene, in such a case, would unfold the commercially thought-out decision(s) made by the CoC. It is very clear from the facts and as has been noted by the SC in a catena of judgements, that, the legislature, consciously has not provided any ground to challenge the CoC’s commercial wisdom.

The RP need not to invoke Regulation 40C as a matter of routine in lieu of Section 12(2) of the IBC, since it provides for an exclusion of the timeline (for completion of CIRP) for any activity that could not have been performed given the lockdown due to the Covid-19 outbreak.

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