Decision To Consolidate CIRP Can Be Taken By CoC And Not By Suspended Director Of Corporate Debtors: NCLT Hyderabad

Brief Facts

This application has been filed by the suspended director of M/s. Manjeera Retail Holdings Private Limited (MRHPL), which, along with its holding company, Manjeera Constructions Limited (MCL), is undergoing Corporate Insolvency Resolution Process (CIRP).

Both Corporate Debtors were admitted into CIRP by this Authority on 18.07.2023, and the Resolution Plans approved by their respective Committees of Creditors (CoC) have been submitted by the common Resolution Professional (RP).

In this application, consolidation of CIRP of two Corporate Debtors is sought.

Contentions:

The applicant submitted that both companies have “common assets and liabilities being inextricably intertwined apart from the other criteria laid down in binding precedents such as common directorship, common financial creditors, common resources, interlinkages of finances, common registered office etc and therefore “CIRP of both Corporate Debtors be consolidated which will lead to value maximisation and benefit several stakeholders of the Corporate Debtors”.

It was further submitted that the total quantum of the resolution plan proposed by the Applicant for both companies exceeds the combined value of the individual plans submitted by the resolution applicants and approved by the respective CoCs.

Per contra, the respondents submitted that the filing is “nothing but an afterthought” and claim that this application, submitted “at such a late stage by the Applicant/suspended director, is yet another attempt to derail the time-bound CIRP process of the Corporate Debtor[s].

It was also submitted that the Applicant being a suspended director “is no longer involved in running the affairs of the Corporate Debtors” and has no locus-standi in filing application for consolidation and it is only the CoCs “being the primary stakeholders who [are] entitled to pray for consolidation, if any”.

It was further submitted that the CDs are “two separate legal entities” and “independent of its members or people controlling it”

Decision of The Tribunal:

The tribunal, at the outset, observed that this application has not been filed in good faith. Our apprehension, that the application—filed more than six months after the initiation of CIRP and following the receipt of viable resolution plans—is intended solely to delay the resolution process, has not been unfounded.

While agreeing with the submission of the respondents, it was observed that the Applicant, being the suspended director of both companies, has no role in the management or operations of the companies and is not a stakeholder in the CIRP for either of the Corporate Debtors (CDs). Having previously led the CDs to insolvency, resulting in the initiation of CIRP for both entities, he has repeatedly attempted to obstruct their resolution.

The tribunal relied on the Supreme Court judgment in Ebix Singapore (P) Ltd. v. Educomp Solutions Ltd. (CoC), (2021) wherein it was observed that “under Insolvency and Bankruptcy Code, CIRP is a “creditor-driven process,” and “settlements between the corporate debtor and the CoC may be in the best interests of all stakeholders,”.

Therefore, the tribunal observed that the CoCs are the primary stakeholders for both CDs. In this case, if the CoCs, exercising their commercial wisdom, do not perceive any benefit in consolidating the CIRPs, their decision should be respected and not substituted by the claims of the suspended director, regardless of how compelling or reasonable they may appear—which, in fact, they are not.

The tribunal disagreed with the applicant reliance on the NCLT judgment in State Bank of India v. Videocon Industries Limited, 2019 wherein the criteria for consolidation of the CIRP was laid down and observed that “relying solely on the criteria of 'common control etc' to determine the consolidation of two CIRPs reflects an incomplete understanding of that judgment.”

The tribunal in the Videocon (supra) observed that “Consolidation is to be utilized as a mechanism to maximise the value of financially stressed group of companies. Economic benefit ought to be the sole purpose and for that a preliminary searching enquiry is suggested which would yield benefit to stakeholders by off-setting any harm, if inflicted, if not consolidated.”

The learned Judge also observed that no single yardstick can be laid down for this purpose. It will have to be seen on a case to case basis.

This determination of economic benefit to the stakeholders, the tribunal observed that can only be done by the CoCs of the respective CDs with their commercial wisdom, which as the Hon'ble Supreme Court emphasized in the case of K. Sashidhar v Indian Overseas Bank and Ors. : (2019) , is paramount and not subject to judicial review.

In the present case, since the CoCs of both CDs have opposed the present application, it is evident that they don't see any economic benefit in consolidation of CIRPs. This is also another important distinction from Videocon's case where CoCs were more or less common and the case for consolidation of CIRPs was pursued by one of the creditors and not the suspended director as in the present case. Moreover, in absence of any resolution, the companies of Videocon group were headed towards liquidation – again, not the situation in the present case.

Therefore, the tribunal observed that the criteria of 'common control etc' espoused in Videocon cannot be applied to this case in isolation.

The Applicant also relies on the case of Radico Khaitan (supra), which involved two Corporate Debtors without any resolution plan, and where their CoCs had resolved to proceed with liquidation. In that context, the Hon'ble NCLAT applied the criteria outlined in Videocon and ruled in favor of consolidating the CIRPs of both CDs.

The tribunal observed that “this case, too, cannot be applied to the present circumstances solely based on the criteria of 'common control etc', as this serves merely as an initial consideration for consolidation and not the decisive factor.”

In the present case, the resolution plans have already been approved by the COCs of both the corporate debtors and which are pending for approval before the Adjudicating Authority therefore therefore the facts and circumstances of the present case are starkly different from the above case.

Accordingly, the present application was dismissed.

Case Title: Mr. Gajjala Yoganand versus Mr. Birendra Kumar Agarwal and Ors.

Case Number: IA No.373 of 2024 in CP(IB) No.296/7/HDB/2022

Date Of Judgment: 18/11/2024

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