Arbitrarily Rejection Of Resolution Plan Is Void , NCLT Allahabad Declares The COC's Action As Void

Background Facts

The Corporate Insolvency Resolution Process ("CIRP") was initiated against Rathi Graphic Technologies Limited ("Corporate Debtor") vide an order of the NCLT Allahabad ("Adjudicating Authority") dated 03.02.2020.

The Resolution Plans submitted by Giriraj Coated Fab Pvt. Ltd. ("Applicant") and Successful Resolution Applicant ("SRA") were finalized for consideration by the Committee of Creditors ("CoC"). On 12.11.2020 the CoC had opined that the Resolution Plans so submitted were far below the liquidation value and had granted the resolution applicants an opportunity to submit their revised resolution plans by 07:00 PM on the same date i.e., 12.11.2020. The Successful Resolution Applicant (SRA) submitted its revised plan before the said deadline. However, the Applicant submitted its revised resolution plan on 15.11.2020 and the same was not considered by the Resolution Professional/CoC due to late submission, stating that timelines for completion of CIRP were to be strictly adhered to.

The Resolution Professional filed an application before the Adjudicating Authority for approval of the Resolution Plan of the SRA and simultaneously the Applicant filed another application seeking direction to the Resolution Professional to place the Applicant's revised resolution plan (submitted on 15.11.2020) before the CoC and reschedule the e-voting thereafter.

Contentions Of The Applicant

The Applicant argued that the Resolution Professional and CoC were working in tandem to oust the Applicant from the process. The revised plan of the Applicant was arbitrarily and unreasonably denied to be considered despite the fact that the Applicant's Plan had a value higher than that of SRA' revised plan, resulting into less realization of value of assets of the Corporate Debtor and defeating the objective of IBC i.e. maximization of value of assets.

It was further submitted that the principles of natural justice were applicable to IBC proceedings and any arbitrariness or biased approach would make decisions void, particularly when grave prejudice was caused to the Applicant.

Contentions Of The Committee Of Creditors

The CoC submitted that the essence of IBC is completing a process in time and thus it cannot be argued that the Resolution Professional and CoC were in a hurry for completing CIRP in time. Further, the allegation of collusiveness had not been proved. It was contended that IBC was a creditor driven process and principles of natural justice were inapplicable to its proceedings, the "principle of equity" in particular was alien to IBC.

Issues

1. Whether principles of natural justice are applicable to the processes/proceedings under IBC, 2016 read with CIRP Regulations, 2016 made thereunder?
2. (ii) Whether principles of natural justice can be considered as a law for the time being in force within the meaning of Section 30(2)(e) of IBC, 2016?

Decision Of The Adjudicating Authority

Applicability of principles of natural justice to IBC proceedings

The Adjudicating Authority observed that CoC, IRP, RP, Liquidator, IBBI, Insolvency Professional agencies and Information utilities are instrumentality of the State, hence, they are bound to follow the rule of law, which embodies within itself principles of natural justice subject to specific exclusions of these principles in a statute.

It was further observed that compliance to principles of natural justice is implied when any statute is silent as to its application. The consequence of violation of principles of natural justice is that the action taken in violation thereof may be declared void or may become voidable at the instance of aggrieved party, hence, the opportunity to remedy its grievance must be provided.

"It can be safely concluded that all actors/ institutions associated with the conduct of CIRP are bound to follow the principles of natural justice which are enshrined in the Constitution of India as a public policy and have also been accepted by judicial forums as fundamental policy of Indian law, whether codified or not. These are to be applied necessarily in all administrative/statutory functions under IBC, 2016 unless excluded explicitly or by necessary implications."

Natural justice as law within 'law for the time being in force' under Section 30(2)(e)

The Bench observed that for any law to remain constitutionally valid, it must conform to the principles of natural justice in both the situations i.e., whether codified or uncodified. "The violations of principles of natural justice results in arbitrariness, therefore violation of principles of natural justice is a violation of equality clause of Article 14. Further, the concept of substantive and procedural due process as incorporated in Article 21, the fairness of approach/ activity which is we are of the view that principles of natural justice are laws in force, and, therefore, these rules fall within the realm of Section 30(2) (e) of IBC, 2016. Thus, any violation thereof by RP/CoC may render a CoC approved resolution plan liable to be rejected in terms of provisions of Section 31(2) of IBC, 2016."

Decision On The Applications

The Bench held that the resolution plan of SRA was approved in violation of law, the CoC members had sufficient time in their hands to complete the CIRP in a reasonable time i.e., within 90 days from the expiry of the CIRP period. Further, on scrutiny the Bench found that the revised plan submitted by the SRA was conditional in nature.

"every person/ entity associated with the processes/ proceedings under IBC, 2016 has a legitimate expectation that CoC will act fairly and would take into consideration the broader objectives of IBC, 2016 over its narrow interest of realization of its own dues which are mostly secured otherwise also……..In the end, we have no hesitation in stating that every inappropriate act or omission by CoC cannot be accepted in the garb of supremacy and non-justiciability of commercial wisdom of CoC."

The Bench declared the action of the CoC to not consider the Applicant's plan submitted on 15.11.2020 as void and held that the Applicant must be given an opportunity afresh to participate in the process of submission of resolution plan.

Further, the Bench also rejected the Resolution Plan of the SRA which was approved by CoC. The Resolution Professional was directed to make a fresh publication of 'Invitation of Expression of Interest' from the prospective resolution applicants.

Case Title: Exim Scrips Dealers Pvt. Ltd v Rathi Graphic Technologies Limited, CP (IB) NO.325/ALD/2019

Counsel For Applicant: Ms. Babita Jain, Adv., Mr. Ashish Makhija, Adv.

Counsel For Resolution Professional: Sh. Amitabh Agarwal, Adv.

Counsel For CoC: Sh. Sumant Batra with Sh. Rahul Mendiratta, Advs.

Click Here To Read/Download Order