NCLT Bengaluru: Issue Of Fixing EMD And Its Reasonableness In EOI, Is A Matter Which Comes Within The Scope Of CoC And Not NCLT.

Background Facts

Dnyanyogi Shri Shivakumar Swamji Sugars Limited (“Corporate Debtor”) operates within the sphere of procuring sugarcane and manufacturing sugar along with its ancillary products.

On 07.03.2022, a Corporate Insolvency Resolution Process (“CIRP”) was initiated against the Corporate Debtor due to a total debt of Rs. 411.05 Crores to its creditors.

On 30.05.2022, Mr Shivadutt Bannanje (“Respondent”) was appointed as the Resolution Professional.

During the 12th meeting held on 07.07.2023, the CoC of the Corporate Debtor decided to require a non-interest-bearing refundable EMD of Rs. 15 Crores for the purpose of submitting EOI to participate in the CIRP.

On 25.07.2023, Atharv Intertrade Private Limited (“Applicant”) submitted its EOI to the Respondent. Along with EOI, the Applicant issued an explanatory letter dated July 25, 2023, highlighting that the EMD amount specified in the invitation to EOI is significantly high.

Further, the Applicant transferred an amount of Rs 50 lakhs in the concerned account of the Corporate Debtor as EMD for submission of EOI with the Respondent.

However, the Respondent vide its email dated 26.7.2023 communicated to the Applicant that the EOI submitted by the Applicant is incomplete as the full amount of Rs. 15 crores has not been deposited by the Applicant and rejected the EOI.

The Applicant filed an application challenging the requirement of Rs.15 crore as EMD to be submitted along with an EOI stating that the said amount is very high.

Contentions of Applicant

The Applicant argued that in the invitation of EOI issued by the Respondent, the minimum net worth for EOI is stipulated as 25 Crores and keeping an amount of Rs 15 Crores as EMD at the time of submitting EOI is very high as it is 60 per cent of the minimum net worth.

The Applicant further argued that the total tangible assets of the Corporate Debtor, as per the audited financials is Rs 39 Crores. Therefore, fixing Rs 15 Crores of EMD to submit EOI for the Corporate Debtor is completely unreasonable and is an attempt to restrict market participation.

The Applicant also pointed out that the amount of 15 Crores is same as the amount of performance guarantee, which is required to be furnished by the Successful Resolution Applicant.

Contentions of Respondent

The Respondent opposed the submissions and argued that a refundable EMD is included in most CIRPs.

The Respondent further argued that under Section 25(2)(h) of the Insolvency and Bankruptcy Code, 2016 read with Regulation 36A(4) of CIRP Regulations, the CoC and the Respondent are solely responsible for fixing the eligibility criteria for prospective resolution applicants, which would form a part of the detailed expression of interest, therefore, the amount of Rs. 15 Crores is reasonable.

NCLT Verdict

The NCLT dismissed the application and observed that the issue of fixing of refundable EMD and its reasonableness is a matter which comes within the scope of ‘Commercial Wisdom’ of the CoC and is not the concern of NCLT.

“This issue of fixing of refundable EMD and its reasonableness is a matter which comes within the scope of ‘Commercial Wisdom’ of the CoC. Hence, this Adjudicating Authority is not inclined to interfere with the decision of the CoC”

Case Title: Atharv Intertrade Private Limited Versus Mr Shivadutt Bannanje, RP for Dnyanyogi Shri Shivakumar Swamji Sugars Limited.

.Case No.: I.A 555 of 2023.

Counsel For Applicant: Shri Srinivas Raghvan Shri Vineeth Reddy

Counsel For Resolution Professional: Shri Raghuram Cadambi.

Click Here To Read/Download Order