Supreme Court Clarifies Valuation and Eligibility in Corporate Insolvency: M.K. Rajagopalan vs. Dr. Periasamy Palani Gounder (2023)

Date of the Judgment: 03 May 2023
Citation: 2023 INSC 486
Judges: Justice Dinesh Maheshwari, Justice Vikram Nath.

Can a resolution applicant be disqualified for a conflict of interest arising from their role in a charitable trust? The Supreme Court of India recently addressed this question while also clarifying the requirements for valuation and eligibility in corporate insolvency resolution processes. This case involves a challenge to the approval of a resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC), focusing on whether the National Company Law Appellate Tribunal (NCLAT) correctly reversed the approval of a resolution plan. The Supreme Court examined issues of valuation, eligibility of resolution applicants, and the treatment of related parties.

Case Background

The case involves a Corporate Insolvency Resolution Process (CIRP) initiated against Appu Hotels Limited. The CIRP was triggered by an application from Tourism Finance Corporation of India Limited (TFCI) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The resolution plan submitted by Mr. M.K. Rajagopalan was initially approved by the National Company Law Tribunal (NCLT), Chennai, but this was later overturned by the National Company Law Appellate Tribunal (NCLAT), Chennai. The NCLAT cited irregularities in the valuation process and the eligibility of the resolution applicant. The matter then reached the Supreme Court.

Timeline

Course of Proceedings

The NCLT approved the resolution plan, but the NCLAT reversed this decision, citing several irregularities. The NCLAT held that the valuation process was flawed, the resolution applicant was ineligible, and the revised resolution plan was not properly presented to the Committee of Creditors (CoC). The NCLAT also directed the resolution professional to start the process afresh from the stage of publication of Form G.

Legal Framework

The judgment refers to several key sections of the IBC and related regulations:

• Section 7, IBC: Deals with the initiation of CIRP by a financial creditor.
• Section 12A, IBC: Allows for the withdrawal of an application admitted under Sections 7, 9, or 10 with the approval of 90% of the CoC.
• Section 21, IBC: Specifies the composition of the Committee of Creditors.
• Section 25, IBC: Lays down the duties of the resolution professional.
• Section 29A, IBC: Lists persons not eligible to be resolution applicants.
• Section 30, IBC: Outlines the process for submission of a resolution plan.
• Section 31, IBC: Provides for the approval of a resolution plan by the Adjudicating Authority.
• Section 61, IBC: Deals with appeals and the Appellate Authority.
• Regulation 27, CIRP Regulations: Pertains to the appointment of registered valuers.
• Regulation 30A, CIRP Regulations: Deals with the withdrawal of application.
• Regulation 35, CIRP Regulations: Specifies the process for determining fair value and liquidation value.
• Regulation 36A, CIRP Regulations: Outlines the procedure for inviting expressions of interest.
• Section 88, Indian Trusts Act, 1882: Addresses advantages gained by a fiduciary.
• Section 164(2)(b), Companies Act, 2013: Specifies disqualifications for directors.
• Section 166(4), Companies Act, 2013: Specifies duties of directors.

Arguments

The arguments presented before the Supreme Court were diverse, focusing on different aspects of the insolvency process. Here’s a summary of the main points:

• Resolution Applicant: Argued that the valuation process was compliant, the non-publication of Form G on the website was a minor procedural irregularity, and the NCLAT overstepped its jurisdiction by declaring the applicant ineligible. They also contended that the revised resolution plan was deemed approved by CoC.
• Resolution Professional: Supported the resolution applicant, emphasizing that the valuation was done properly and the procedural irregularities were not material. They also argued that the CoC’s commercial wisdom should not be interfered with.
• Promoter: Contended that the valuation was flawed, the resolution applicant was ineligible, and the NCLAT was correct in setting aside the resolution plan. They also highlighted that their settlement offer was not properly considered.
• Related Party: Argued that they should not be discriminated against in the resolution plan for being a related party.
• State Bank of India (SBI): Emphasized the need for a timely resolution and supported the fresh CIRP process while leaving the promoter a chance to make a better offer.
• Edelweiss and Associates: Raised concerns about the amount deposited by the resolution applicant and suggested that the promoter should better the resolution plan through a Swiss Challenge Process.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for determination:

1. Whether the valuation process complied with Regulations 27 and 35 of the CIRP Regulations.
2. Whether non-publication of Form G on the designated website was a material irregularity.
3. Whether the resolution applicant was ineligible under Section 29A(e) of the IBC due to Section 164(2)(b) of the Companies Act, 2013.
4. Whether the resolution applicant was ineligible under Section 88 of the Indian Trusts Act, 1882.
5. Whether the resolution plan violated Section 166(4) of the Companies Act, 2013.
6. Whether the revised resolution plan was valid without being presented to the CoC.
7. Whether the increase in fees of the resolution professional was a prudent decision of the CoC.
8. Whether the Appellate Tribunal erred in applying principles of non-discrimination to related parties.
9. Whether the Appellate Tribunal erred in holding that the settlement offer of the promoter was not considered by the CoC.
10. What is the impact and effect of subsequent events, particularly the approval of the settlement offer of the promoter by the CoC?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court relied on several cases and legal provisions to reach its conclusions:

Judgment

The Supreme Court upheld the NCLAT’s decision to reject the resolution plan, but not for all the reasons cited by the NCLAT. The Court found that the resolution applicant was indeed ineligible due to a conflict of interest arising from their role in a charitable trust, and that the revised resolution plan was not properly presented to the CoC.

How each authority was viewed by the Court?

The Supreme Court cited several authorities, and their treatment is as follows:

• Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Ors. : (2020) 8 SCC 531: The Court relied on this case to explain the commercial wisdom of CoC and the treatment of related parties.
• K. Sashidhar v. Indian Overseas Bank : (2019) 12 SCC 150: The Court used this case to explain the limited judicial intervention in CoC decisions.
• Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Limited and Ors.: (2022) 1 SCC 401: The Court reiterated the primacy of the commercial wisdom of the CoC, citing this case.
• Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh and Ors. : (2020) 11 SCC 467: The Court used this case to clarify that a resolution plan need not match the liquidation value.
• Phoenix ARC (P) Ltd v. Spade Financial Services Ltd. and Ors. : (2021) 3 SCC 475: This case was cited to explain the treatment of related parties in the CIRP.
• Kalpraj Dharamshi and Anr. v. Kotak Investment Advisors Limited and Anr. : (2021) 10 SCC 401: The Court used this case to hold that non-publication of Form-G on the website cannot be treated as a grave irregularity.
• Pratap Technocrats (P) Ltd. and Ors. v. Monitoring Committee of Reliance Infratel Ltd and Anr. : 2021 SCC OnLine SC 569: The Court used this case to reiterate the limited scope of interference in successful resolution plans.
• EBIX Singapore Pvt. Ltd. v. Committee of Creditors of Educomp Solutions Ltd. and Anr. : (2022) 2 SCC 401: The Court relied on this case to state that a resolution plan is binding between the successful resolution applicant and the CoC.
• Vallal RCK v. Siva Industries and Holdings Ltd. and Ors.: 2022 SCC OnLine SC 717: The Court referred to this case to reiterate that the creditors are dominus litis in an insolvency proceeding.
• Brilliant Alloys (P) Ltd. v. S. Rajagopal and Ors.: (2022) 2 SCC 544: The Court referred to this case to reiterate that the creditors are dominus litis in an insolvency proceeding.
• Facor Alloys Ltd. v. Bhuvan Madan and Ors.: Civil Appeal No. 5129 of 2021: The Court referred to this case to differentiate between related and non-related parties under resolution plans.
• Swiss Ribbons (P) Ltd. and Anr. v. Union of India and Ors. : (2019) 4 SCC 17: The Court relied on this case to explain the objectives and scheme of the IBC.
• C. Raja John v. R. Raghavendran and Ors. : Comp. Appl. (AT)(CH)(Ins) No. 207 of 2021: The Court referred to this case to highlight that if DIN is activated, Section 29-A(e) of the Code will not be applicable.
• Venus Recruiters Private Limited v. Union of India and Ors.: 2020 SCC Online Del. 1479: The Court referred to this case to highlight the jurisdiction of the Adjudicating Authority to entertain an application under Section 43 after the approval of the resolution plan.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following points:

• Conflict of Interest: The Court emphasized the importance of upholding the integrity of the resolution process, and therefore, the resolution applicant’s conflict of interest due to his role in the charitable trust was a major factor in the decision.
• Procedural Compliance: The Court stressed the need for strict adherence to the procedures outlined in the IBC and its regulations, particularly regarding the approval of resolution plans by the CoC.
• Commercial Wisdom of CoC: The Court reiterated the importance of the commercial wisdom of the CoC but clarified that this does not override the need for compliance with statutory requirements.

Logical Reasoning

The Court also considered alternative interpretations but ultimately rejected them, emphasizing the need for strict adherence to the law and the importance of preserving the integrity of the CIRP.

The Court quoted the following from the judgment:

• “The case on hand squarely falls within the ambit of Section 88 of the Indian Trusts Act, and as such, the Resolution Plan is illegal.”
• “Compliance with statutory requirements in regulating a matter of practice and procedure are mandatory.”
• “Such kind of procedural failure amounts to material irregularity and goes to the root of the matter, making the plan void and non-est in law.”

The Court also analyzed the impact of subsequent events, particularly the approval of the settlement offer of the promoter by the CoC, and directed the Adjudicating Authority to consider the fresh settlement proposal.

Conclusion

The Supreme Court’s judgment in M.K. Rajagopalan vs. Dr. Periasamy Palani Gounder provides significant clarification on the valuation and eligibility requirements in corporate insolvency resolution processes. The judgment underscores the importance of procedural compliance, the need to avoid conflicts of interest, and the limited scope of judicial intervention in the commercial wisdom of the CoC. It also highlights the need for resolution applicants to act with utmost transparency and integrity.

Key Takeaways:

• Eligibility: Resolution applicants must be free from conflicts of interest and comply with all eligibility criteria under the IBC.
• Valuation: Valuation processes must be robust and transparent, although they need not match liquidation value.
• Procedural Compliance: Strict adherence to the procedures outlined in the IBC and its regulations is mandatory.
• Commercial Wisdom: While the commercial wisdom of the CoC is respected, it cannot override statutory requirements.
• Related Parties: There is no mandatory requirement to treat related and unrelated parties equally in a resolution plan.
• Settlement Offers: Settlement offers must be duly considered by the CoC, but they are not bound to accept them.

This judgment serves as a crucial guide for all stakeholders involved in corporate insolvency resolution processes, ensuring that the objectives of the IBC are upheld.