IBC| Principle Of Commercial Wisdom Not Validate A Decision Taken By CoC In Contravention Of Law : Supreme Court

The Bench comprising of Justice Dinesh Maheshwari and Justice Vikram Nath, while adjudicating an appeal filed in M.K. Rajagopalan v Dr. Periasamy Palani Gounder & Anr., has upheld the NCLAT’s order whereby the Successful Resolution Applicant was declared ineligible in terms of Section 88 of the Indian Trusts Act, 1882, since he had submitted two resolution plans, one in individual capacity and one in the capacity of Managing Trustee of the Trust.

BACKGROUND FACTS

The Tourism Finance Corporation of India Limited filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against Appu Hotels Limited (“Corporate Debtor”). The National Company Law Tribunal (“NCLT”) admitted the Corporate Debtor into CIRP on 05.05.2020. The Resolution Plan submitted by Mr. M.K. Rajagopalan (“Successful Resolution Applicant”) for the Corporate Debtor was approved by the Committee of Creditors (“CoC”) and thereafter by the NCLT.

The approval of Resolution Plan was challenged before the National Company Law Appellate Tribunal (“NCLAT”) on various grounds. On 17.02.2022, the NCLAT rejected the resolution plan so approved by the CoC and the NCLT. The matter was remanded to CoC, with direction to the Resolution Professional to proceed with CIRP from the stage of publication of Form ‘G’, while inviting Expression of Interest afresh as per the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”). Further, the Successful Resolution Applicant was declared ineligible in terms of Section 88 of the Indian Trusts Act, 1882 and disqualified in terms of Section 164(2)(b) of the Companies Act, 2013.

The Successful Resolution Applicant (“Appellant/SRA”) filed an appeal before the Supreme Court against the NCLAT’s order.

ISSUE

Whether the resolution applicant is ineligible to submit a resolution plan so as to act as alter ego of the Trust that had already been declared ineligible; and submission of plan by resolution applicant is barred by virtue of Section 88 of the Trusts Act?

Relevant Law

Section 88 of Indian Trust Act, 1882

“88. Advantage gained by fiduciary—

Where a trustee, executor, partner, agent, director of a company, legal adviser, or other person bound in a fiduciary character to protect the interests of another person, by availing himself of his character, gains for himself any pecuniary advantage, or where any person so bound enters into any dealings under circumstances in which his own interests are, or may be, adverse to those of such other person, and thereby gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained.”

SUPREME COURT VERDICT

The Bench observed that a Trust named Sri Balaji Vidyapeeth (“Trust”) had also submitted a Resolution Plan for the Corporate Debtor, which was rejected on the ground that the trust is for charitable purpose and could not run a profit-making entity. The Successful Resolution Applicant/SRA is the Managing Trustee of Sri Balaji Vidyapeeth trust and had submitted a separate resolution plan in individual capacity as well, which came to be approved by the NCLT.

The SRA submitted that his financial capability was independent of the funds of the Trust and he cannot be rendered ineligible to submit a Resolution Plan on the ground that the Trust has been disqualified.

The Bench observed as under:

“The EOIs in the first place were submitted by the present appellant-resolution applicant for himself as also on behalf of the trust. The Appellate Tribunal has rightly noticed that this filing of two EOIs by the resolution applicant, one for himself and another one on behalf of the ineligible trust has a material bearing on the competence of the resolution plan of the appellant, for being directly hit by Section 88 of the Trusts Act. The Appellate Tribunal has rightly held that the applicant-Mr. M.K. Rajagopalan, being the Managing Trustee of the said trust, cannot be permitted to act as its alter ego in implementing the resolution plan to gain financial advantage for himself.”

Further, the SRA had claimed that the entities under his leadership were growing rapidly while ensuring quality of service to nation and public at large. Based on this claim, the Bench opined that it is difficult to detach the SRA from the Trust. Therefore, the NCLAT had rightly observed that the SRA was attempting to act as alter ego of the ineligible applicant i.e. the Trust. The benefit from his own (individual’s) resolution plan cannot escape the operation of Section 88 of the Trusts Act.

“Even if the appellant would assert that his financial capability was independent of trust money, the fact of the matter remains that he projected the overall picture of his own profile while also relying on his status as Managing Trustee of the said trust, Sri Balaji Vidyapeeth. Thus, any pecuniary advantage gained by him under the resolution plan in question would be directly subsumed by operation of Section 88 of the Trusts Act. This would, in all practical purposes, bring about a position that what could not be done directly for the said trust was sought to be done by the appellant by way of this indirect methodology.”

On the aspect of commercial wisdom of CoC in approval of resolution plan, the Bench observed that “The principles underlying the decisions of this Court respecting the commercial wisdom of CoC cannot be over-expanded to brush aside a significant shortcoming in the decision making of CoC when it had not duly taken note of the operation of any provision of law for the time being in force.”

The NCLAT’s order was upheld on the aspect of approved resolution plan being in contravention of the legal provisions for the time being in force.

The Bench held that the Resolution Plan could not have been approved by the NCLT on twin reasons, (i) ineligibility of Successful Resolution Applicant in view of Section 88 of the Indian Trust Act; and (ii) the failure of Resolution Applicant to place the revised resolution plan before the CoC prior to seeking approval of the NCLT. On the remaining issues, the NCLAT’s order has been set aside.

The appeal has been partly allowed.

Case Title: M.K. Rajagopalan v Dr. Periasamy Palani Gounder

Citation:  2023 LiveLaw (SC) 403