Insolvency and Bankruptcy Part 3

Summary of Question-   NCLT’s Power vis- a- vis rejection of Resolution Plan by COC.

Question – Whether   NCLT is empowered to enquire into and adjudicate  rejection of resolution plan by COC (committee of creditors) as to its correctness or not.

 Answer-  No. Upon receipt of a rejected resolution plan, the adjudicating authority (NCLT) is not expected to do anything more ; it (NCLT) can't enquire into /adjudicate  whether rejection of resolution plan by COC (committee of creditors) is correct or not ; it (NCLT) is obligated to initiate liquidation process under Section 33(1) of the I&B Code; neither the adjudicating authority (NCLT) nor the appellate authority (NCLAT) has been endowed with the jurisdiction to reverse the commercial wisdom of the dissenting financial creditors; the Amendment Act of 2018,  requiring reason to be given by dissenting Financial Creditor of COC,   is prospective application


Rationale-

In CIVIL  APPEAL NO.10673 OF 2018 , decided on 5th. Feb. 2019, the Hon'ble Supreme Court observed and held, among others, the followings:

‘31. Indeed, in terms of Section 31 of the I&B Code, the adjudicating authority (NCLT) is expected to deal with two situations. The first is when it does not receive a resolution plan under subsection (6) of Section 30 or when the resolution plan has been rejected by the resolution professional for noncompliance of Section 30(2) of the I&B Code or also when the resolution plan fails to garner approval of not less than seventy five percent of voting share of the financial creditors, as the case may be; and there is no alternate plan mooted before the expiry of the statutory period. The second is when a resolution plan duly approved by the CoC by not less than 75% of voting share of the financial creditors is submitted before it by the resolution professional under Section 30(6) of the Code, for its approval.”

 

33. As aforesaid, upon receipt of a “rejected” resolution plan the adjudicating authority (NCLT) is not expected to do anything more; but is obligated to initiate liquidation process under Section 33(1) of the I&B Code. The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC muchless to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors…..”

 

39. In our view, neither the adjudicating authority (NCLT) nor the appellate authority (NCLAT) has been endowed with the jurisdiction to reverse the commercial wisdom of the dissenting financial creditors and that too on the specious ground that it is only an opinion of the minority financial creditors. The fact that substantial or majority percent of financial creditors have accorded approval to the resolution plan would be of no avail, unless the approval is by a vote of not less than 75% (after amendment of 2018 w.e.f. 06.06.2018, 66%) of voting share of the financial creditors. To put it differently, the action of liquidation process postulated in Chapter III of the I&B Code, is avoidable, only if approval of the resolution plan is by a vote of not less than 75% (as in October, 2017) of voting share of the financial creditors. Conversely, the legislative intent is to uphold the opinion or hypothesis of the minority dissenting financial creditors. That must prevail, if it is not less than the specified percent (25% in October, 2017; and now after the amendment w.e.f. 06.06.2018, 44%). The inevitable outcome of voting by not less than requisite percent of voting share of financial creditors to disapprove the proposed resolution plan, de jure, entails in its deemed rejection.”


43. It was argued that the dissenting financial creditors have not assigned any reason for recording their dissent and therefore, their action is vitiated. As per the provisions applicable at the relevant time in October 2017, there was no requirement of recording reasons for the dissent. That requirement has been introduced by an amendment to the regulations effected in 2018 w.e.f. 4th July, 2018. Whether that amendment is prospective or has retrospective effect is a matter which will be considered a little later.”


44. Suffice it to observe that in the I&B Code and the regulations framed thereunder as applicable in October 2017, there was no need for the dissenting financial creditors to record reasons for disapproving or rejecting a resolution plan. Further, as aforementioned, there is no provision in the I&B Code which empowers the adjudicating authority (NCLT) to oversee the justness of the approach of the dissenting financial creditors in rejecting the proposed resolution plan or to engage in judicial review thereof. Concededly, the inquiry by the resolution professional precedes the consideration of the resolution plan by the CoC. The resolution professional is not required to express his opinion on matters within the domain of the financial creditor(s), to approve or reject the resolution plan, under Section 30(4) of the I&B Code. At best, the Adjudicating Authority (NCLT) may cause an enquiry into the “approved” resolution plan on limited grounds referred to in Section 30(2) read with Section 31(1) of the I&B Code. It cannot make any other inquiry nor is competent to issue any direction in relation to the exercise of commercial wisdom of the financial creditors be it for approving, rejecting or abstaining, as the case may be. Even the inquiry before the Appellate Authority (NCLAT) is limited to the grounds under Section 61(3) of the I&B Code. It does not postulate jurisdiction to undertake scrutiny of the justness of the opinion expressed by financial creditors at the time of voting. To take any other view would enable even the minority dissenting financial creditors to question the logic or justness of the commercial opinion expressed by the majority of the financial creditors albeit by requisite percent of voting share to  approve the resolution plan; and in the process authorize the adjudicating authority to reject the approved resolution plan upon accepting such a challenge. That is not the scope of jurisdiction vested in the adjudicating authority under Section 31 of the I&B Code dealing with approval of the resolution

plan.”

 

“45. To put it differently, since none of the grounds available under Section 30(2) or Section 61(3) of the I&B Code are attracted in the fact situation of the present case, the Adjudicating Authority (NCLT) as well as the Appellate Authority (NCLAT) had no other option but to record that the proposed resolution plan concerning the respective corporate debtor (KS&PIPL and IIL) stood rejected. Further, as no alternative resolution plan was approved by the requisite percent of voting share of the financial creditors before the expiry of the statutory period of 270 days, the inevitable sequel is to pass an order directing initiation of liquidation process against the concerned corporate debtor in the manner  specified in Chapter III of the I&B Code.”

 

“51. We are not impressed by this submission. In our opinion, by this amendment, a new norm and qualifying standard for approval of a resolution plan has been introduced. That cannot be treated as a declaratory/clarificatory or strict sensu procedural matter as such. Whereas, the stated Amendment Act makes it expressly clear that it shall be deemed to have come into force on the 6th day of June, 2018. Thus, by mere use of expression “substituted” in Section 23(iii) (a) of the Amendment Act of 2018, it would not make the provision retrospective in operation or having retroactive effect. This interpretation is reinforced by the fact that there is no indication in the Amendment Act of 2018 that the legislature intended to undo and/or govern the decisions already taken by the CoC of the concerned corporate debtors prior to 6-06-2018.”


“53…………….. As aforesaid, the amendment of 2018 cannot be considered as clarificatory but it envisages a new norm of threshold for considering the decision of the CoC as approval of the resolution plan. The Amendment Act of 2018 having come into force w.e.f. 6th day of June, 2018, therefore, will have prospective application and apply only to the decisions of CoC taken on or after that date concerning the approval of resolution plan.”


“60. In the first place, amendment to regulation cannot have retrospective effect so as to impact the decision of the CoC of the concerned corporate debtor – taken before the amendment of the said regulation. There is no indication in the Code as amended or the regulations to suggest that as a consequence of this amendment the decisions aleady taken by the concerned CoC prior to 3rd July, 2018 be treated as deemed to have been vitiated or for that matter, necessitating reversion of the proposal to CoC for recording reasons, that too beyond the statutory period of 270 days. A new life cannot be infused in the resolution plan which did not fructify within the statutory period, by such circuitous route.”

 

“66. As a result, we hold that the NCLAT has justly concluded in the impugned decision that the resolution plan of the concerned corporate debtor(s) has not been approved by requisite percent of voting share of the financial creditors; and in absence of any alternative resolution plan presented within the statutory period of 270 days, the inevitable sequel is to initiate liquidation process under Section 33 of the Code. That view is unexceptional. Resultantly, the appeals must fail.”

 

 

Summary of Question-  Service of  Notice , as per NCLAT Rules, on the other side is mandatory in Appeal before  NCLAT

Question – Whether  mere sending of paperbook of an Appeal, by the Appellant  on the other side (but no issuance of Notice as per  NCLAT Rules) is sufficient to treat as Service of Notice.

 Answer-  No. 
 

Rationale-

1. In CIVIL APPEAL No.1929 OF 2019 (JAI BALAJI INDUSTRIES LIMITED  Vs. STATE BANK OF INDIA & ORS), decided on the 8th. March 2019, facts , in brief,  were that Appeal was filed by the Bank before NCLAT against the order of the NCLT ;  Advance copy of the appeal paperbook filed by Bank  was  delivered by post at the registered office of the other side ;  Despite this,   the other side did not appear before NCLAT;  NCLAT passed order;  Against the order of the NCLAT , this Appeal was preferred in the Supreme Court against the Bank on the ground for violation of the  right to be heard, audi alteram partem, one of the principles of natural justice,    in   as   much   as Notice of appeal was not served on the other side .

 

2. The Hon’ble supreme Court observed and held: 

 

“ 7. While the respondent no.1 has submitted that an advanced copy of the appeal was served on the appellant, the same cannot be treated as service of notice as stipulated under Rule 48 of the NCLAT Rules which, inter alia, provides:

 “48. Issue of notice­ -

(1) Where   notice   of   an   appeal   or   petition   or interlocutory application is issued by the Appellate         Tribunal,   copies   of   the   same,   the   affidavit   in support thereof and if so ordered by the Appellate       Tribunal   the   copy   of   other   documents   filed therewith, if any, shall be served along with the notice      on the other side.” 

 

8. Rule 48 of the NCLAT Rules clearly stipulates service of notice on the other side, pursuant to issuance of notice by the NCLAT in the appeal, regardless of supply of advance copy of appeal paperbook prior to the issuance of notice by NCLAT.

 

9. Further, Rule 52 of the NCLAT Rules categorically states that the judicial section of the registry of the NCLAT shall record, in the “Notes of the Registry” column in the order sheet, the details     regarding   completion   of   service   of   notice   on   the respondents. It notes:

“52. Entries regarding service of notice or process.­

The Judicial Section of the Registry shall record in   the column  in   the   order   sheet   ‘Notes   of   the   Registry’,  the   details   regarding   completion   of   service of notice   on the respondents, such as date of issue of notice, date of  service, date of return of   notice, if unserved, steps take  for issuing fresh   notice and date of completion of services etc.”

 

10. However, it is pertinent to note that the material placed before us do not indicate that the aforementioned stipulation    has been complied with. As per the rejoinder affidavit filed on behalf     of   the   appellant,   the   counsel   for   the   appellant   had undertaken a search of the register of process fee and summons, and the concerned file in the office of the NCLAT on 28.02.2019. However, no record of respondent no. 1 having paid the process fee for issuance and service of notice to the appellant was found.

 

11. Thus, in view of the above position, it is abundantly clear that no notice was served upon the appellant before the NCLAT as stipulated under the rules, and the right of the appellant to be  heard,  audi   alteram   partem,   has   been   violated   [See: Ghaziabad Development Authority  v.  Machhla Devi, 2018 SCC OnLine SC 2178].”

       

Summary of Question-   Statutory Dues as Operational Debt

Question – Whether  Statutory  Dues can be treated as  Operational Debt under     I & B Code .

 Answer-  Yes.  Statutory dues like  'Income Tax', 'Value Added Tax' etc. come within the meaning of 'Operational Debt' under section 5(21) of the I&B Code. As such, such statutory dues has to be included in the Resolution Plan.
 


Rationale-

 

The Hon'ble NCLAT in the case of Company Appeal (AT) (Insolvency) No. 205 of 2017 in  Pr. Director General of Income Tax (Admn. & TPS)  Vs. M/s. Synergies Dooray Automotive Ltd., decided on 20th. March 2019, observed and held :

"29. ‘Operational Debt’ in normal course means a debt arising during the operation of the Company (‘Corporate Debtor’). The ‘goods’ and  ‘services’ including employment are required to keep the Company  (‘Corporate Debtor’) operational as a going concern. If the Company  (‘Corporate Debtor’) is operational and remains a going concern, only in such case, the statutory liability, such as payment of Income Tax, Value  Added Tax etc., will arise. As the ‘Income Tax’, ‘Value Added Tax’ and other statutory dues arising out of the existing law, arises when the Company is operational, we hold such statutory dues has direct nexus with operation of the Company. For the said reason also, we hold that all  statutory dues including ‘Income Tax’, ‘Value Added Tax’ etc. come within  the meaning of ‘Operational Debt’.

30. For the said very reason, we also hold that ‘Income Tax Department  of the Central Government’ and the ‘Sales Tax  Department(s) of the State Government’ and ‘local authority’, who are entitled for dues arising out of the existing law are ‘Operational Creditor’ within the meaning of Section 5(20) of the ‘I&B Code’."