Supreme Court Upholds Rejection of Resolution Plan Due to Ineligibility and Procedural Lapses: M.K. Rajagopalan vs. Dr. Periasamy Palani Gounder (2023)

Introduction

Date of the Judgment: May 3, 2023

Citation: (2023) INSC 417

Judges: Dinesh Maheshwari, J., Vikram Nath, J.

Can a resolution plan be approved if the resolution applicant is found to be ineligible and the process has not been followed properly? The Supreme Court of India recently addressed this crucial question in a case concerning the Corporate Insolvency Resolution Process (CIRP) of Appu Hotels Limited. The court examined whether the National Company Law Appellate Tribunal (NCLAT) was correct in rejecting a resolution plan approved by the National Company Law Tribunal (NCLT). This case highlights the importance of strict adherence to both the eligibility criteria for resolution applicants and the procedural requirements of the Insolvency and Bankruptcy Code, 2016 (IBC).

The Supreme Court, in this judgment, has upheld the rejection of a resolution plan by the NCLAT, primarily due to the ineligibility of the resolution applicant and procedural lapses in the CIRP. The court emphasized the need for strict compliance with the IBC and its regulations, particularly concerning the eligibility of resolution applicants and the proper conduct of the resolution process.

Case Background

The corporate debtor, Appu Hotels Limited, faced financial difficulties, which led to Tourism Finance Corporation of India Limited (TFCI) initiating CIRP by filing an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The NCLT admitted this application on May 5, 2020, and appointed an interim resolution professional (IRP). During the CIRP, various meetings of the Committee of Creditors (CoC) took place, and a resolution plan submitted by Mr. M.K. Rajagopalan was eventually approved by the CoC with 87.39% voting share on January 22, 2021. The NCLT approved this resolution plan on July 15, 2021, despite objections from various creditors and the promoter of the corporate debtor. However, the NCLAT reversed the NCLT’s decision on February 17, 2022, citing several irregularities and ineligibility of the resolution applicant. The NCLAT remanded the matter back to the CoC for a fresh CIRP.

The resolution applicant, along with the resolution professional, then appealed to the Supreme Court challenging the NCLAT’s order. The Supreme Court heard the appeals and also considered subsequent events, including a settlement proposal by the promoter which was approved by the CoC during the pendency of the appeals in the Supreme Court.

Timeline

Legal Framework

The judgment revolves around several key provisions of the Insolvency and Bankruptcy Code, 2016 (IBC), and its related regulations:

• ✓ Section 7 of the IBC: Deals with the initiation of the Corporate Insolvency Resolution Process (CIRP) by a financial creditor.
• ✓ Section 12A of the IBC: Allows for the withdrawal of CIRP applications with the approval of 90% of the Committee of Creditors (CoC).
• ✓ Section 21 of the IBC: Defines the composition of the Committee of Creditors (CoC) and the ineligibility of related parties.
• ✓ Section 25 of the IBC: Outlines the duties of the resolution professional, including inviting resolution plans.
• ✓ Section 29A of the IBC: Specifies ineligibility criteria for resolution applicants, including disqualification as a director.
• ✓ Section 30 of the IBC: Lays down the requirements for a resolution plan and its approval by the CoC.
• ✓ Section 31 of the IBC: Concerns the approval of a resolution plan by the Adjudicating Authority.
• ✓ Section 61 of the IBC: Provides the grounds for appealing an order approving a resolution plan.
• ✓ Section 88 of the Indian Trusts Act, 1882: Deals with the fiduciary duties of a trustee and the prohibition of gaining personal advantage.
• ✓ Section 164(2)(b) of the Companies Act, 2013: Specifies disqualifications for directors, including failure to repay deposits.
• ✓ Section 166(4) of the Companies Act, 2013: Prohibits directors from involving themselves in situations where there is a conflict of interest.
• ✓ Regulation 27 of the CIRP Regulations: Mandates the appointment of registered valuers.
• ✓ Regulation 30A of the CIRP Regulations: Prescribes the procedure for withdrawal of application under Section 12A.
• ✓ Regulation 35 of the CIRP Regulations: Deals with the determination of fair value and liquidation value of the corporate debtor.
• ✓ Regulation 36A of the CIRP Regulations: Mandates the publication of Form G for inviting expression of interest.
• ✓ Regulation 38 of the CIRP Regulations: Specifies the mandatory contents of a resolution plan.

These provisions, along with various judicial interpretations, form the basis for the Supreme Court’s analysis and decision in this case.

Arguments

The arguments presented before the Supreme Court were diverse, reflecting the complex nature of the case:

• Resolution Applicant’s Arguments:
  • Argued that the settlement proposal by the promoter was not valid as it lacked proof of funds and was a delaying tactic.
  • Contended that Section 88 of the Trusts Act does not disqualify him under Section 29A of the IBC.
  • Submitted that the valuation was done properly and that the CoC approved it.
  • Claimed that non-publication of Form G on the website was a minor procedural irregularity.
  • Argued that the revised resolution plan did not need further approval from the CoC.
  • Asserted that the commercial wisdom of the CoC should not be interfered with.
• Resolution Professional’s Arguments:
  • Argued that the valuation process was compliant with regulations and the CoC was provided with the necessary information.
  • Submitted that non-publication of Form G on the website was a technical issue.
  • Contended that the revised resolution plan was approved in the ninth CoC meeting.
  • Argued that the settlement proposal was not in consonance with the IBC.
  • Claimed that the issue of ineligibility was not raised before the NCLT.
  • Submitted that related parties can be treated differently under the resolution plan.
• Promoter’s Arguments:
  • Argued that the CoC did not consider the settlement proposals made under Section 12A of the IBC.
  • Contended that the resolution applicant was ineligible due to Section 88 of the Trusts Act and Section 164(2)(b) of the Companies Act.
  • Submitted that the assets were undervalued and the valuation process was flawed.
  • Claimed that non-publication of Form G on the website was a material irregularity.
  • Argued that the revised plan was not placed before the CoC.
  • Asserted that related parties cannot be discriminated against in the resolution plan.
• Other Stakeholders:
  • SBI, a financial creditor, supported the rejection of the resolution plan due to the ineligibility of the resolution applicant.
  • Edelweiss and associates, also financial creditors, raised concerns about the amount deposited by the resolution applicant and suggested a Swiss challenge process for the promoter.
  • Dharani Finance Limited, a related party, argued against discrimination in the resolution plan.

Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for determination:

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 there had been non-compliance of Regulation 36-A(2)(iii) of the CIRP Regulations for want of publication of Form G on the designated website not later than 75th day from the insolvency commencement date; and failure to advertise as mandated had a direct impact on the maximization of asset value, particularly when the entire CIRP was conducted during lockdown at the time of Covid-19 pandemic?
3. Whether the resolution applicant is ineligible to submit a resolution plan in terms of Section 29-A(e) of the Code for being disqualified to act as a director 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 resolution plan in question leads to violation of Section 166(4) of the Companies Act and hence, cannot be approved in terms of Section 30(2)(e) of the Code?
6. 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?
7. Whether the Appellate Tribunal has erred in making observations against increase of the fees of the resolution professional and assuming the possibility of its impact on his decision to submit the resolution plan before the Adjudicating Authority without approval of CoC?
8. Whether the Appellate Tribunal has erred in applying the principles of non-discrimination in relation to related party of corporate debtor and thereby holding against the resolution plan in question for want of provision for related party?
9. Whether the Appellate Tribunal has erred in holding that settlement offer of the promoter in terms of Section 12-A of the Code was not placed for consideration of CoC; and as to whether non-consideration of such a proposal has any bearing on the question of approval of the resolution plan in question?
10. What is the impact and effect of the subsequent events, particularly of the approval of settlement offer of the promoter by the CoC in its nineteenth meeting held on 12.10.2022 by 100% majority of the voting share?

Treatment of the Issue by the Court

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

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court addressed each submission made by the parties and how each authority was viewed by the Court in its reasoning for resolving the issue.

The Court cited the following authorities in its reasoning:

Decision

The Supreme Court upheld the NCLAT’s decision to reject the resolution plan, primarily due to the ineligibility of the resolution applicant under Section 88 of the Trusts Act and Section 166(4) of the Companies Act. The court found that the resolution applicant was acting as the alter ego of an ineligible trust and had a conflict of interest. The court also noted that the revised resolution plan was not presented to the CoC before being submitted to the NCLT, which was a procedural lapse. The Supreme Court set aside the NCLAT’s findings on the valuation process, non-publication of Form G, and ineligibility under Section 164(2)(b) of the Companies Act. However, it maintained that the ineligibility under Section 88 of the Trusts Act and the violation of Section 166(4) of the Companies Act were sufficient grounds for rejecting the resolution plan. The court also disapproved of the NCLAT’s observations regarding the fees of the resolution professional and the treatment of related parties.

The Supreme Court acknowledged the subsequent events, particularly the approval of the promoter’s settlement offer by the CoC. However, the court left all relevant aspects open for the consideration of the Adjudicating Authority, emphasizing that the settlement proposal must comply with the law.

Principles

The following principles were established by the Supreme Court in the present case:

• ✓ Strict Compliance with IBC: The court emphasized the need for strict compliance with the provisions of the IBC and its regulations.
• ✓ Ineligibility of Resolution Applicant: The court reiterated that a resolution applicant’s ineligibility under Section 29A of the IBC is a fundamental flaw that cannot be overlooked.
• ✓ Conflict of Interest: Directors of companies must avoid situations where there is a conflict of interest.
• ✓ Procedural Compliance: The resolution process must adhere to the prescribed procedures, including the approval of revised resolution plans by the CoC.
• ✓ Commercial Wisdom vs. Mandatory Requirements: While the commercial wisdom of the CoC is paramount, it cannot override mandatory legal requirements.
• ✓ Treatment of Related Parties: Related parties can be treated differently under a resolution plan, but there is no mandate to treat them equally.
• ✓ Settlement Proposals: Settlement proposals under Section 12A of the IBC must be considered by the CoC, but they must also comply with the law.

Flowchart of the Case

Ratio

Conclusion

The Supreme Court’s decision in M.K. Rajagopalan vs. Dr. Periasamy Palani Gounder reinforces the importance of strict adherence to the Insolvency and Bankruptcy Code, 2016, and its regulations. The case highlights that while the commercial wisdom of the Committee of Creditors is crucial, it cannot override mandatory legal requirements, particularly those concerning the eligibility of resolution applicants and procedural compliance. The judgment underscores the need for resolution applicants to be free from conflicts of interest and to ensure that the resolution process is conducted transparently and in accordance with the law. The Supreme Court’s decision provides clarity on several critical aspects of the CIRP, contributing to a more robust and reliable insolvency resolution framework in India.