NCLAT Chennai: Resolution Professional Is Empowered U/S 25(1) Of IBC To Reject CoC's Proposal For Renewal Of Bank Guarantees By Corporate Debtor

Background Facts:

KSK Mahanadi Power Company Ltd. ('KMPCL'/ 'Corporate Debtor') imported goods from China for the construction of KMPCL's Power Plant, before the Corporate Insolvency Resolution Process ('CIRP'), initiated on 03.10.2019.

Before the CIRP, 5 Banks ('Appellants') had issued the Customs Bank Guarantees with a condition that the said Bank Guarantee shall be kept alive until Unit Nos. 2 & 5 achieve confirmed Mega Power Plant (MPP) status. The Banks requested for renewal of the same pending the grant of MPP status of Unit Nos. 2 & 5 upon expiry of the Customs Bank Guarantees.

As per the RP, there is no exemption that KMPCL can claim for customs duty liability since no goods are being imported by KMPCL or its contractor for the operationalization of the units of KMPCL. Therefore, the RP intimated to the CoC that the said renewals are not necessary for the 'Going Concern' nature of KMPCL.

The RP had also informed the Banks that the renewal of the Customs Bank Guarantees would only increase the financial burden of KMPCL which would have to bear the commission charges and renewal charges which are exorbitant amounts as can be seen from the Minutes of the Meetings of the CoC.

The Banks have preferred an appeal against the impugned order dated 23.08.2023 dismissing the application preferred before the Adjudicating Authority. As per this order, the Adjudicating Authority had observed that u/s 25(1) of IBC, the RP can reject the CoC's proposal for renewal of Bank Guarantees provided by the Corporate Debtor before the initiation of CIRP proceedings, as renewing these do not in any way protect and preserve the assets of the Corporate Debtor or support its operations as a going concern.

NCLAT Verdict:

The NCLAT Chennai dismissed the appeal and held that the RP is empowered under Section 25(1) of IBC to reject the proposal of CoC for renewal of Bank Guarantees provided by the Corporate Debtor as renewing those would not consequently lead to any advantage or any valuable gains.

The Appellate Tribunal pointed out that on the reading of Sections 25(1), 20(1) read with Section 23(2) of the IBC which are as follows:

Section 20. Management of operations of corporate debtor as going concern

(1) The interim resolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.

Section 23. Resolution professional to conduct corporate insolvency resolution process

(1) Subject to section 27, the resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period.

(2) The resolution professional shall exercise powers and perform duties as are vested or conferred on the interim resolution professional under this Chapter.

(3) In case of any appointment of a resolution professional under sub-sections (4) of section 22, the interim resolution professional shall provide all the information, documents and records pertaining to the corporate debtor in his possession and knowledge to the resolution professional.

Section 25. Duties of the Resolution Professional

(1) It shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.

(2) For the purposes of sub-section (1), the resolution professional shall undertake the following actions, namely:—

(a) take immediate custody and control of all the assets of the corporate debtor, including the business records of the corporate debtor;

(b) represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration proceedings;

(c) raise interim finances subject to the approval of the committee of creditors under section 28;

(d) appoint accountants, legal or other professionals in the manner as specified by Board;

(e) maintain an updated list of claims;

(f) convene and attend all meetings of the committee of creditors;

(g) prepare the information memorandum in accordance with section 29;

(h) invite prospective lenders, investors, and any other persons to put forward resolution plans;

(i) present all resolution plans at the meetings of the committee of creditors;

(j) file application for avoidance of transactions in accordance with Chapter III, if any; and

(k) such other actions as may be specified by the Board.

As per these provisions, the RP is duty-bound to make every effort to preserve the assets and value of the property of the Corporate Debtor Company and manage it effectively as a 'Going Concern'.

Further, Section 2(13) of the IBC reads as:

Section 2(13) "insolvency resolution process costs" means—

(a) the amount of any interim finance and the costs incurred in raising such finance;

(b) the fees payable to any person acting as a resolution professional;

(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern;

(d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and

(e) any other costs as may be specified by the Board;

The said section provides that any costs incurred by the RP in running the business of the Corporate Debtor as a 'Going Concern' forms part of the CIRP costs.

The Appellate Tribunal observed that there is no exemption which the KMPCL can claim for Customs Duty Liability when there is no guarantee for the MPP status of the Non-Operational Units and since no goods are being imported by the Corporate Debtor as it is undergoing CIRP. Moreover, it need not be burdened with the Commission and renewal charges amounting to Rs. 70 Crores as these would only increase the financial burden of the Corporate Debtor with no positive benefits accruing.

In conclusion, NCLAT observed that no substantial grounds exist to interfere with the well-considered order of the Adjudicating Authority.

Case Title: IDBI Bank Ltd. and Ors. v. Mr. Sumit Binani, RP of KSK Mahanadi Power Company Ltd.

Case No.: Company Appeal (AT) (CH) (INS.) No. 385 / 2023

Counsel for Appellant: Mr. P.L. Narayanan, Senior Advocate for Mr. E. Hariharan, Advocate

Counsel for Respondent: Mr. Allwin Godwin & Ms. Niranjana Pandian, Advocates

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