Case Comment: Maharashtra Seamless Limited vs Padmanabhan Venkatesh and Ors.

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CASE COMMENT: MAHARASTHRA SEAMLESS LIMITED  …APPELLANT
         VERSUS
                                      PADMANABHAN VENKATESH & ORS …RESPONDENTS
(Civil Appeal No. 4242 of 2019)

In the present case the two issues were decided by Supreme Court
1. Whether the scheme of the Code contemplates that the sum forming part of the resolution plan should match the liquidation value or not?
2. Whether Section 12-A of the Code is the applicable route through which a successful resolution Applicant can retreat?

Brief Facts of the Case and the Decision of NCLT:

The present application was filed by Indian Bank being the Financial Creditor Under Section 7 of Insolvency and Bankruptcy Code, 2016. The total debt of the corporate debtor (CD) (United Seamless Tubulaar Private Limited) was Rs. 1897 crores, out of which Rs. 1652 crores comprised of term loans from two entities DB International (Asia) Limited and Deutsche Bank AG, Singapore Branch. There was also debt on account of working capital borrowing of Rs. 245 crores from Indian Bank. As per the process embedded in the code for CIRP (Corporate Insolvency Resolution Process) all the requisite actions were carried out by Interim Resolution Professional (IRP )and Resolution Professional (RP).

Two registered valuers were appointed by the Resolution Professional for the valuation of corporate debtor. The corporate debtor was valued at Rs. 681 crores and Rs. 513 crores respectively. On account of substantial difference in the aforesaid valuation, a third valuer was appointed which valued the corporate debtor at Rs. 352 crores. Accordingly, the average of the two closest estimates of valuation, the liquidation value was assessed to be Rs. 432.92 crore. The Resolution Professional received four Resolution Plans after being called for Expression of Interest following with the Request for Resolution Plans. The Resolution Plans were placed before COC (Committee of Creditors). The plan submitted by Maharashtra Seamless Limited was approved by majority of the COC by 87.10% of the votes.

In the present case the application was filed by Resolution Professional for the approval of Resolution Plan for United Seamless Tubulaar Private Limited under section 30(6) and 31 of IBC, 2016 along with regulation 39 (4) of IBBI (Insolvency Resolution for Corporate Persons) and Rule 11 of NCLT Rules, 2016. The approval was in respect with the Resolution Plan submitted by Resolution Applicant – M/s Maharashtra Seamless Limited.

It was averred by the suspended board of directors that the COC meeting and the approval of Resolution Plan was in contravention to the Code. The tribunal passed detailed order to re-determine the liquidation value of the Corporate Debtor and then placed the revised Resolution Plan before COC for voting which was not duly followed by the RP. The other Resolution Applicants were not given the opportunity to submit their revised plans. Therefore, it was prayed that the Resolution Plan be rejected.

The Resolution Plan of MSL which was being approved by the COC in majority aggrieved by the order of tribunal to re determine the liquidation value and the fair value appealed NCLAT. The appellate authority directed the adjudicating authority to pass order under section 31 of IBC, 2016 uninfluenced by the previous order.

The RP filed an application under section 30 and 31 of IBC, 2016 along with regulation 39 (4) of IBBI (Insolvency Resolution for Corporate Persons). The RP also informed the tribunal about the order of the adjudicating authority to re determine the liquidation value was complied, which was now at Rs. 597.54 crores as compared to previous amount of Rs. 439.92 crores.

Further Suspended Board of Directors were permitted to attend the COC meeting and express their views which were recorded. The Resolution Plan of MSL was approved by 87.10% of the votes. The bid of the MSL of Rs. 477 crores were far more below the liquidation value of Rs. 597.54 crores.

The RP contended that the adjudicating authority cannot sit in appeal over the commercial wisdom of the COC members in approving resolution plan. The RP relied on two cases M/s Bhaskara Agro Agencies Vs M/s Super Agri Seeds private Ltd and Sri Ram Residency Pvt. Ltd. Vs Kuldeep Verma wherein the NCLAT held that feasibility and viability of the resolution plan is to be decide by the COC no third party can question the decision of the COC. The Counsel contended that the liquidation value is only for the benefit of the COC to decide whether to approve or reject a resolution plan. The COC has the power to accept the resolution plan which is below the liquidation price.

The Tribunal held that as per the orders of the Hon’ble NCLAT it has to pass order uninfluenced by the previous order and it has to test resolution plan in conformity with the provisions of section 30(2) of the IBC, 2016. The question regarding approval from CCI was also answered that it has already been discussed by the COC and it was came to the conclusion that it is not required, even if it is required then the RA has a time period of one year to get the desired permissions.
The Resolution plan submitted by M/s MSL was approved.

Decision of NCLAT:

Two appeals have been preferred one by Mr. Padmanabhan Venkatesh- (Promoter) and another by Indian Bank – (Financial Creditor) against the order dated 21st January, 2019 passed by the Adjudicating Authority (National Company Law Tribunal), Hyderabad Bench, Hyderabad. By the impugned order, the Resolution Plan submitted by the Respondent- M/s. Maharashtra Seamless Ltd. –  has been approved.

An objection was raised against the resolution plan submitted by resolution applicant on different grounds that the Resolution Plan was below the liquidation value and the fair value should be adopted before approval of the Resolution Plan. The other ground was ineligibility of the Resolution Applicant to submit the Resolution Plan.

It was contended that the operational creditors have been discriminated and not given the same treatment as financial creditors. The liquidation value being Rs.597.54 Crores, the upfront payment as per the resolution plan being less i.e., Rs. 477 Crores, the payment to the operational creditors was lower than the proportionate liquidation value, therefore, the resolution plan, as approved by the Adjudicating Authority was against Section 30(2)(b).

The question before the NCLAT was whether the order approving the resolution plan should be set aside or the RA should be asked to amend the resolution plan with certain modification to ensure successful Resolution which was the foremost objective of IBC, 2016.

NCLAT held it is the at the discretion of COC to consider the feasibility and viability of the resolution. Further the COC should ask the Resolution Applicants to make amendments into their plans as per the provisions of the Code.

The plan proposed should be in consonance with the code and ensures the value maximization of the assets of the corporate debtor and balance the interest of all the stakeholders. In the present case  Rs. 477 crores were to be paid upfront which were less as compared to liquidation value. To overcome this, RA agreed to infuse Rs. 180 Cr directly into CD and Rs. 57 Crores towards 25 per cent margin money of working capital expenditure

The successful RA Contended that it is willing to pay the verified Operational Creditors at the same percentage as that of the Financial Creditors i.e. 25 per cent which shall be paid within 30 days after the approval. The NCLAT referred Hon’ble Supreme Court in “Swiss Ribbons (P.) Ltd. v. Union of India and Binani Industries Ltd. v. Bank of Baroda where NCLAT has, while looking into viability and feasibility of resolution plans has always confirmed operational creditors are given roughly the same treatment as financial creditors, and if not then such plans are either rejected or modified so that the Operational Creditors’ rights are safeguarded. In the present case, as we find that the Operational Creditors have been discriminated and not given the same treatment as Financial Creditors, the impugned order approving the Resolution Plan cannot be upheld.

The NCLAT held that the RA should pay Rs. 120.54 crores more which would then be par with the average liquidation value of the corporate debtor making the value of the resolution plan from 477 crore to 597.54 crores.

If the RA is able to comply with the order then the adjudicating authority would allow RA to take over the possession of the corporate debtor. If the RA failed to comply the same within 30 days then the order passes by NCLT is to be set aside and the adjudicating authority will pass order in accordance with law.

Decision of Supreme Court:

The MSL being the successful resolution applicant sought directions upon the corporate debtor as also the police and administrative authorities for effective implementation of the resolution plan. MSL was not being given access to the assets of the corporate debtor. Further they have sought refund of the sum deposited in terms of the resolution plan along with interest. In addition to which MSL has also applied for withdrawal of the resolution plan.

The contentions of the MSL being denied access to assets of corporate debtor and delay in implementation of the resolution plan. They had 477 crores deposited into escrow account for the resolution of corporate debtor. They were compelled to bear the interest for the amount of Rs.477 crores.

Issues to be decided by the Supreme Court.

1. Whether the scheme of the Code contemplates that the sum forming part of the resolution plan should match the liquidation value or not?

It has been held that the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors. The COC should make sure that the corporate debtor needs to keep going as a going concern because the rationale being that during resolution, the corporate debtor remains a going concern, whereby the financial creditors will have the opportunity to lend further money, the operational creditors will have a continued business and the workmen and employees will have job opportunities; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of during the insolvency resolution process.

If the Adjudicating Authority finds the abovementioned parameters have not been taken care of, it may send a resolution plan back to the COC. If the adjudicating authority has been satisfied that the COC has taken care of the parameters mentioned then only it has to pass the resolution plan. Further the reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority.

The question whether operational creditor has paid at par with other creditors has already been answered in Essar Steel’s case . Further The successful RA has already has agreed to clear dues of operational creditor in percentage at par with operational creditor. Also, none of the OC’s have came forward in objection of the plan.

The contentions of the Indian Bank and the said erstwhile promoter of the corporate debtor were that how can COC release property valued at Rs.597.54 crores to MSL for Rs.477 crores. Even though they were having a bid of Rs. 490 crores was higher than the successful resolution applicant i.e. MSL.
The Supreme Court held that no provision in the Code or Regulations has been brought to notice under which the bid of any Resolution Applicant has to match liquidation value arrived at in the manner provided in clause 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

While it may seem that release of assets at a value below its liquidation value is inequitable, the Court ought to rely on the commercial wisdom of the creditors. Further the main objective of the code is maximisation of value of assets of stakeholders, and to balance the interests of all the stakeholders of the corporate debtor, the court observed that resolution of the corporate debtor should be given preference over liquidation of the corporate debtor.

It was held that the object behind prescribing such valuation process is to assist the COC to take decision on a resolution plan properly. Once, a resolution plan is approved by the COC, the statutory mandate on the Adjudicating Authority under section 31(1) of the Code is to ascertain that a resolution plan meets the requirement of sub-sections (2) and (4) of section 30 thereof. Further in the present case AA has not found breach of these provisions

The NCLAT in its decision while overruling AA order ignored the commercial wisdom of COC and the plan was analysed on the basis of quantitative analysis. NCLAT exceeded its jurisdiction by delving into the rationale behind the COC’s acceptance of the resolution plan.

Section 31(1) of the Code lays down that for final approval of a resolution plan, the Adjudicating Authority has to be satisfied that the requirement of sub-section (2) of section 30 of the Code has been complied with. The proviso to section 31(1) of the Code stipulates the other point on which an Adjudicating Authority has to be satisfied. The scope of interference by the Adjudicating Authority in limited judicial review has been laid down in the case of Essar Steel. The Appellate Authority ought not to have interfered with the order of the Adjudicating Authority in directing the successful Resolution Applicant to enhance their fund inflow upfront.

2. Whether Section 12-A of the Code is the applicable route through which a successful resolution Applicant can retreat?

The Supreme Court held that the exit route prescribed in Section 12A is not applicable to a Resolution Applicant. The procedure envisaged in the said provision only applies to applicants invoking Sections 7, 9 and 10 of the Code.

The order of the NCLAT is set aside. The order of the Adjudicating Authority passed on 21-1-2019 is affirmed. The supreme Court ordered, MSL shall remit additional sum of Rs.50.72 lakhs to the Resolution Professional for further remittance to the operational creditors as per their dues. This sum has already been offered to the operational creditors, as recorded in the impugned order.

Accordingly, the Resolution Professional is directed to take physical possession of the assets of the corporate debtor and hand it over to the MSL (appellant) within a period of four weeks. The police and administrative authorities are directed to render assistance to the Resolution Professional to enable him to carry out these directions

Analysis:

As per the Supreme Court Judgement, COC can accept a resolution plan which is lower to the liquidation value. There might be other reasons due to which there is expansion in powers of COC. Neither fair value nor liquidation value is disclosed to the resolution applicant, therefore, while submitting his plan the resolution applicant factors market reality. The RA has envisaged in his plan on how he going to keep CD as a going concern. Hence for the very same objective there may also be additional investment w.r.t. working capital, etc which may be required to be made, therefore, even if the resolution value is lower than the liquidation value, the plan may be approved.

Though it is said that AA should not act beyond its scope, there are chances of malpractices between RP, RA and COC. These practises would defy the objective of the code. Therefore, the AA is required to intervene but up to a certain extent.

The Court in Essar Steel held that the COC must necessarily fulfil objectives of IBC before approving a plan. Accepting a resolution plan bid at an amount lower the liquidation value goes against the basic aims and objectives of the IBC. this excessive expansion of the scope of commercial wisdom might pose a hindrance to the objectives envisaged in IBC. The present case can be seen as a starting point for a boundless expansion of commercial wisdom of COC. The expansion of powers of COC may result in its abuse.

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