CoC Entitled To Liquidate Corporate Debtor If No Approved Resolution Plan Is Placed Before Adjudicating Authority Within Statutory CIRP Period: NCLAT

Brief Facts:

The Corporate Debtor (Oracle Home Textiles Ltd) was admitted into insolvency on 09.08.2018. Interested resolution applicants were given time to submit their resolution plans to the Resolution Professional (RP) by 22.04.2019. The CIRP period came to an end on 13.05.2019. On 11.02.2020, the CoC decided to proceed with the liquidation of the Corporate Debtor with 99.61% vote share.

On 18.02.2020, the Adjudicating Authority allowed the Appellant to submit a resolution plan within two week. The Adjudicating Authority also directed the CoC to consider the resolution plan besides extending CIRP period. The Appellant submitted their resolution plan along with EMD to the CoC. Before their plan could be considered by the CoC, two IAs were filed by other resolution applicants before the Adjudicating Authority seeking permission for submission of plans. On 21.01.2021, the Adjudicating Authority reserved its orders on both IAs.

The Appellant submitted their final resolution plan with Addendum on 05.05.2021. The RP informed the SRA by email on 10.05.2021 that the resolution plan was approved by the CoC with a voting majority of 99.90% and was subject to the order reserved by the Adjudicating Authority on 21.01.2021.

On 12.05.2021, the RP wrote to the SRA to re-submit the plan after including two clauses which had purportedly been found missing by RP.

On 21.05.2021, the SRA urged the RP to issue a Letter of Intent (LoI) as per RFRP terms following which on 23.05.2021, RP issued the LoI with request to SRA to accept the same. On 29.05.2021, the SRA in a letter to the RP stated that the LoI was beyond the scope of approved resolution plan and requested for issue of a fresh and unconditional LoI. RP replied that since LoI was issued in accordance with discussions held in CoC meetings in which SRA was present, he was not in a position to issue unconditional LoI.

Meanwhile, the SRA filed IA No. 1205 of 2021 before Adjudicating Authority inter-alia seeking directions to be given to the RP to re-issue an unconditional LoI. On 15.06.2021, the SRA re-submitted the resolution plan of 31.12.2020 with Addendum to include the missing clauses.

On 23.06.2021, RP issued a second and fresh LoI after mentioning that the LoI of 23.05.2021 stood revoked. On 23.07.2021 during discussions in the CoC meeting, the SRA wanted to make two changes in the LoI dated 23.06.2021. The first change was with regard to deletion of clause relating to employees' dues and the second change was to add a clause providing for submission of unconditional PBG within seven days.

On 26.07.2021, the SRA sent an e-mail to the RP objecting to the LoI issued subsequent to the CoC meeting held on 23.07.2021. On the same date, the CoC revoked the LoI and put to vote a resolution for forfeiture of EMD of Rs 1 Cr. of the SRA.

On 28.08.2021, the SRA filed an IA seeking inter alia directions from the Adjudicating Authority to issue unconditional LoI and for refund of EMD on ground of having been wrongly forfeited. On 05.06.2023, the resolution for liquidation of Corporate Debtor was passed by a voting majority of 99.61% by CoC.

On 30.04.2024, the Adjudicating Authority dismissed IAs 1205 of 2021 and 2029 of 2021 filed by the Appellant while allowing IA No. 3914 of 2023 filed by the RP for liquidation of the Corporate Debtor. Aggrieved by the three impugned orders, the three appeals were preferred.

In the three appeals, the Appellant-SRA sought the following reliefs:

• Directions to reinstate or refund the forfeited EMD.
• Issuance of an unconditional Letter of Intent (LOI).
• Approval of the resolution plan already sanctioned by the CoC with a 99.90% majority.
• Quashing of the Adjudicating Authority's order dated 30.04.2024.
• Direction that MSME status of the Corporate Debtor cannot be a ground for forfeiture of the EMD and Performance Bank Guarantee.
• Directions for the RP to submit the approved resolution plan to the Adjudicating Authority for final approval.
• Stay on liquidation proceedings pending appeal resolution.

Submissions:

By the Counsel for the SRA:

• Once the resolution plan was approved by the CoC, the CoC could not have passed a resolution for liquidation of the Corporate Debtor. Reliance was placed upon Ebix Singapore Pvt. Ltd. vs. CoC of Educomp Solutions Ltd. and Anr. which held that the resolution plan even prior to the approval of the Adjudicating Authority is binding inter se the CoC and the SRA. In terms of the Ebix judgment it was not open for CoC to withdraw its approval to a resolution plan.
• Once CoC exercised their commercial wisdom, they cannot change their view as they are bound by their own decision in approving the resolution plan.
• The objective of the IBC is to revive a Corporate Debtor and not send it to liquidation.

By the Counsel for Andhra Bank Ltd. (Respondent No. 1):

• The CIRP ended on 21.02.2023 and no resolution plan approved by the CoC was available to be submitted to Adjudicating Authority for its approval within the CIRP period. Hence in accordance with Section 33(1) of the IBC, there was no option but to send the Corporate Debtor into liquidation.
• The CoC could not have imposed additional conditions of being bound by all earlier discussions and decisions during CoC meetings by way of LoI which was issued pursuant to the approval of the resolution plan. By imposing new and overarching conditions, new liability was thrust upon the SRA which was impermissible since CoC is not entitled to disturb the approved resolution plan as the same is binding on them as much as on the SRA.
• The resolution plan approved by the CoC is sacrosanct and cannot be subjected to any modification by way of LoI. The LoI does not have any legal sanctity over a resolution plan approved by CoC. The Appellant by unilaterally forcing the RP to amend/modify the resolution plan by demanding issue of an unconditional LoI acted in a manner not permissible in law.

Observations of the NCLAT:

The Tribunal noted the following observations of Adjudicating Authority in respect of the issue whether the LoI was conditional:

“Thus, it is settled position in law that once the resolution plan submitted by the Resolution Applicant is approved by the CoC, then the Resolution Applicant cannot withdraw or modify the Resolution Plan. Therefore, in our considered view, the Applicant is precluded from raising any objections to the conditions stated in the Letter of Intent inasmuch as they are not alien to the resolution plan (along with the addendum thereto) submitted by the Applicant which was approved by the CoC. If the Applicant's objections to the conditions stated in the Letter of Intent are entertained at this stage, then the same would tantamount to withdrawing or modifying the resolution plan (along with the addendum thereto) by the Applicant/SRA after its approval by the CoC, which is not permissible in law.”

The Tribunal held that Adjudicating Authority has relied on the correct interpretation of the judgment of Supreme Court in Ebix which held that resolution applicant cannot be permitted to withdraw or modify the resolution plan after approval by the CoC. Once CoC had approved the resolution plan, the SRA stood precluded from raising any observations to the conditions stated in the LoI as these were not alien to the resolution plan as submitted by the SRA which was approved by the CoC.

The Tribunal noted that the CoC had taken cognizance of the fact that the CIRP period had ended on 12.02.2019 which kept on getting extended from time to time. There was no point in extending the CIRP any further since the SRA had failed to accept the LoI. The Tribunal further stated that the CoC, in its commercial wisdom, determined that this was a suitable case to order liquidation in accordance with Section 33(1)(a) of the IBC since the Adjudicating Authority had not received a resolution plan under Section 30(6) of the IBC before the end of the maximum period of 330 days allowed for the completion of CIRP.

The Tribunal held that the Adjudicating Authority had correctly relied on Gulab Chand Jain Vs RP of Vijay Timber Industries wherein it was held that the CoC may change its mind and pass a resolution liquidating the Corporate Debtor after the CoC has approved the resolution plan, provided the Adjudicating Authority has not approved the resolution plan. Since a long time had elapsed since commencement of insolvency, the Corporate Debtor should go into liquidation forthwith in the interest of all stakeholders.

The Tribunal observed that the statutory construct of IBC in terms of Section 33 empowers the CoC to decide to liquidate the Corporate Debtor any time before the confirmation of the resolution plan by the Adjudicating Authority. Therefore, the decision to liquidate was based on commercial wisdom and is not subject to judicial review, with the exception of making sure the resolution plan complies with the IBC and associated regulations.

The Tribunal also noted that the Explanation to Section 33(2) of the IBC clearly states that the CoC has the authority to make a final decision to liquidate the Corporate Debtor before the CoC has approved the resolution plan. It held that the decision of the CoC is a business decision taken in the exercise of their commercial wisdom which is not amenable to judicial review.

The Tribunal concurred with the reasoning of the Adjudicating Authority, which ordered the liquidation of the Corporate Debtor. Consequently, it directed the liquidator to progress the liquidation proceeding in terms of the e-auction notice.

Case Title: Sanjay Dave vs. Andhra Bank Ltd. & Ors.

Case Number: Company Appeal (AT) (Insolvency) No. 1128 of 2024 with Company Appeal (AT) (Insolvency) No. 1131 of 2024 with Company Appeal (AT) (Insolvency) No. 1134 of 2024

For Appellant : Mr. Sanat Jariwala, CA. Ms. Purti Gupta, Ms. Henna George, Ms. Sangita Selwal, Advocates.

For Respondents : Ms. Anjali Sharma, Mr. S.K. Sagar Advocates for R1; Mr. Deepak Bashta, Advocate for R3, Mr Mahesh Chand Gupta (Liquidator).

Date: 29.10.2024