The National Company Law Tribunal, Kolkata (“NCLT”) has in its order dated April 6, 2022, in the matter of CFM Asset Reconstruction Private Limited v. S. S. Natural Resources Private Limited and Another [IA No. 538/KB/2021 in CP (IB) No. 349/KB/2017] held that a corporate debtor cannot be sent into liquidation just because liquidation value is more than the value of the resolution plan.

Facts
Ramsarup Industries Limited (“Corporate Debtor”) was admitted into corporate insolvency resolution process (“CIRP”) under Section 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Subsequently, the resolution plan submitted by S. S. Natural Resources Private Limited (“SRA/ Successful Resolution Applicant”) was approved by the committee of creditors (“CoC”) and the adjudicating authority. Upon approval of the resolution plan, nine appeals were preferred before the National Company Law Appellate Tribunal (“NCLAT”). One of the appeals was preferred by SRA on the grounds that the adjudicating authority has materially changed and altered the plan by imposing additional financial obligations on SRA.

There was another appeal of interest, filed by Vanguard Credit and Holdings Private Limited (“Vanguard”) before the Hon’ble Supreme Court (“SC”) (“Vanguard Appeal”). Vanguard was claiming to be owner of the land on which factory of the Corporate Debtor is situated. During the pendency of Vanguard’s appeal, the SRA did not take any steps for implementation of the plan and waited for the decision of the SC. The promoter of the Corporate Debtor also challenged the approval of the resolution plan.

The NCLAT by its common order dated March 4, 2021 (“NCLAT Order”) dismissed the appeals. It directed the monitoring committee to start taking steps to implement the resolution plan. It further directed that in case of failure by SRA to implement the resolution plan, an application for liquidation of the Corporate Debtor should be moved before the adjudicating authority, without any further delay.

Vanguard and SRA, both preferred a civil appeal before the SC. However, SRA’s appeal was dismissed, on May 4, 2021, on grounds of lack of substantial question of law. SRA decided to wait for the decision of the SC in Vanguard’s Appeal. However, the appeal was dismissed by order dated July 2, 2021.

Pursuant to the NCLAT Order, the chairman of the monitoring agency, which was overseeing the implementation of the resolution plan, issued a notice calling for the seventh meeting of the monitoring agency. In that meeting, SRA expressed its willingness to implement the resolution plan subject to some conditions. Further, SRA was unwilling to release the upfront payment to the monitoring agency to meet the CIRP costs and also objected to utilisation of the performance security until the Vanguard Appeal was decided by the SC.

SRA in an e-mail drew attention to the aforesaid meeting, stating that the demand by the monitoring committee to compensate the financial creditors, on account of delay in implementation of the resolution plan, is unjustified. Further, SRA also contended that it should be permitted to deposit the CIRP costs in an escrow account and its disbursement be kept on hold. The disbursement of the performance security and the interest earned thereon should also be kept on hold till disposal of the Vanguard Appeal that was pending before the SC.

CFM Asset Reconstruction Private Limited (“Applicant”) alleged that SRA had miserably delayed implementation of the resolution plan. Such delay had significantly depleted the time value of money and resulted in loss of business opportunity for the creditors and other stakeholders. Therefore, the creditors and stakeholders should be compensated adequately for such loss.

It was in this conspectus of facts that the interlocutory application was filed by the Applicant seeking (i) liquidation of the Corporate Debtor; (ii) direction against the monitoring agency to forfeit the performance security amount deposited by SRA; and (iii) seeking payment of interest by SRA from the date of approval of the resolution plan till the implementation of the resolution plan by SRA.

Issue
Whether a corporate debtor can be sent into liquidation just because liquidation value is more than the value of the resolution plan.

Arguments

Contentions raised by the Applicant:

The Applicant submitted that the adjudicating authority approved the resolution plan on September 4, 2019. Despite this, SRA went up in appeal challenging this approval. Ultimately, the NCLAT dismissed the appeal. Appeals were also preferred before the SC and the important fact is that on May 4, 2021, the SC dismissed SRA’s appeal and affirmed the order of the NCLAT. Therefore, insofar as SRA was concerned, the approved resolution plan had become final and binding.

The Applicant further submitted that after the order of the SC, there were several meetings of the monitoring committee. However, no steps had been taken. SRA put in a condition that whatever money it puts in must remain in escrow. Whatever money it puts in for day-to-day operation is subject to the monies being refunded to SRA in the event of the success of the Vanguard Appeal. This condition has been imposed after the resolution plan had been challenged right up to the SC, which appeal was dismissed. Therefore, SRA does not appear to be interested in implementation, which is why the Applicant has now applied for liquidation.

Further, various observations were noted that proved that the real intent of SRA was to wriggle out from implementation of the approved resolution plan. In spite of this, the NCLAT gave SRA a second lease of life to implement the resolution plan, with a condition that if it fails, the Corporate Debtor should be sent into liquidation.

On May 23, 2021, a mail was sent by SRA, which was squarely in breach of the approved resolution plan. Conditions were sought to be brought in apropos the implementation of the resolution plan, among which was that (i) performance security amount of INR 35 crores (provided to the resolution professional), which was encashed by the CoC in January 2020, to not be disbursed; and (ii) the entire implementation of the resolution plan was now made conditional on the result of the Vanguard Appeal. According to the Applicant, this shows that SRA had acted in breach of the resolution plan, and that it sought to impose conditions on implementation of the resolution plan after its approval by the adjudicating authority, the appellate tribunal and the SC, which is not permitted in law.

Subsequently, an interim application was filed on June 8, 2021 for liquidation of the Corporate Debtor in view of non-implementation of the resolution plan by SRA. The Applicant submitted that the breach having been committed, the Corporate Debtor should now be sent into liquidation.

It was further submitted that SRA had made incorrect statements in its reply affidavit. SRA had averred that to demonstrate its bona fide intention, payments towards workmens’ dues had been made. However, some of the items stated therein could not be treated as payments. When the breaches occurred, they were accepted as breaches by SRA.

The Applicant stated that SRA had delayed the implementation of the approved resolution plan by about 21 months, and now SRA is unwilling to implement the resolution plan unconditionally. The liquidation value in terms of the approved resolution plan was far more than the enterprise value for which the resolution plan of SRA had been approved. Since SRA had frustrated the entire exercise of the CIRP and the assets of the Corporate Debtor were depleting with time, it would leave all the stakeholders in a state of devastation.

Further, it was submitted that the resolution plan was approved in 2019 based on the valuation for the year 2018. Successive appeals by SRA should not be a ground for condonation of delay in implementation of the Resolution Plan. SRA had no reason to wait for the Vanguard Appeal to be decided by the SC.

Further, the Applicant submitted that one of the objectives of the IBC is maximisation of assets. If such maximisation lies in liquidation, then no advantage is to be gained by allowing implementation of a resolution plan after more than two years.

The Applicant also submitted that Section 33(4) of the IBC enjoins the adjudicating authority to pass an order of liquidation. The issue is to determine whether there is a default or not. The mandate of the statute is that if there is a default, the liquidation order must follow.

It is an accepted fact that after March 4, 2021, SRA did not comply with the timelines of the NCLAT Order or what was provided for in the resolution plan. In fact, right from March 4, 2021 to May 4, 2021, when SRA’s appeal to the SC got dismissed, there was no step taken under the resolution plan.

SRA said that the IBC is concerned with resolution and not liquidation of the corporate debtors, on the basis that the preamble does not speak of liquidation. The Applicant conceded that this was true, but liquidation is the consequence of failure of resolution.

Section 33(4) of the IBC requires that a liquidation order shall be passed, if the adjudicating authority determines that the corporate debtor has contravened the provisions of the resolution plan. The Applicant submitted that the fundamental issue is whether the resolution plan and its implementation was resisted after the NCLAT Order. If the determination was that it was so, then that is the end of the matter. Even if the term “shall”, occurring in Section 33(4) of the IBC, was to be read as “may,” no discretion should be exercised in favour of SRA, because it did not comply with its obligations even though an appeal remained pending.

Contentions raised by SRA:

SRA submitted that Vanguard filed an appeal against the NCLAT Order, since it was the owner of the land in which the factory of the Corporate Debtor was situated. The resolution plan provided that the land will come to the Corporate Debtor. This was a key feature of the resolution plan.

SRA further submitted that in the case of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited and Another (“Veer Gurjar Judgment”), the SC held that the primary focus of the IBC is to ensure revival and continuation of the corporate debtor and, as far as feasible, to save it from liquidation. The SC had reiterated that the IBC is not a mere recovery legislation for creditors. If that is the principle of the IBC, then a creditor who files an application for commencing liquidation proceeding after the resolution plan has been approved, and that too only for the purpose of realising a higher value, should be discouraged and such application ought not to be entertained by the adjudicating authority.

SRA further submitted that the Vanguard land is recognised in the NCLAT Order. Therefore, the Vanguard Appeal becomes important and central to the resolution plan, without which the implementation was in jeopardy. If Vanguard was allowed to pull out, then the resolution plan would have failed, since there would be no resolution plan to be implemented at all. Naturally, SRA waited for the Vanguard Appeal to be decided.

Furthermore, SRA submitted that when an appeal is filed from an order and the appeal is disposed of, the original order is no longer enforceable. Therefore, the enforceable order is only of March 4, 2021, since the order of the adjudicating authority had now merged in the order of the appellate tribunal. He submitted that the adjudicating authority cannot now look into the conduct of SRA. The same principle will apply once the statutory appeal is filed before the SC against the NCLAT Order. Automatically, the NCLAT Order will merge into the order of the SC. SRA submitted that if a statutory remedy is available, then the order of the appellate forum will hold the field. So, at least before the May 4, 2021 judgment of the SC in SRA’s appeal, nothing survives. At this point, at best, the order dismissing Vanguard’s Appeal survives. Hence, once an appeal is filed, the matter is no longer enforceable.

On July 2, 2021, the SC dismissed Vanguard’s Appeal. SRA addressed an e-mail on the same day to the monitoring agency. On July 7, 2021, SRA offered to implement the entire resolution plan. However, at the meeting, the Applicant stated that unless interest was paid, it would oppose implementation of the approved resolution plan. Therefore, after July 7, 2021, all delay in implementation is attributable to the Applicant, which prevented the monitoring agency and SRA from implementing the resolution plan.

SRA urged the adjudicating authority to take a holistic picture. The adjudicating authority is not a forum for creditors to come and ask for interest for delay. The adjudicating authority must look at the conduct of the creditor, just as it must look at the conduct of SRA also. It pointed out that only one creditor, that is, the Applicant, is asking for interest, and that too after preventing the monitoring agency and SRA from implementing the resolution plan. Therefore, the creditor cannot use the forum of the adjudicating authority to arm-twist SRA to part with additional interest.

Observations of the NCLT

The NCLT observed that it was absolutely clear that the land standing in the name of Vanguard was the centrepiece of the entire resolution plan. It further noted that SRA had requested that the payments made by SRA towards, inter alia, workmen’s dues, be kept in an escrow account and not be distributed to the creditors because such distribution will cause irretrievable harm to SRA. The NCLT did not consider this to be an unreasonable request, or one that reflects any mala fide conduct on the part of SRA.

The NCLT further observed that, as judicially noticed by the SC in the Veer Gurjar Judgment, the preamble of the IBC lays a lot of emphasis on insolvency resolution within the timelines prescribed. Liquidation should be the last resort, when everything else has been attempted and failed. In the present case, there is a successful resolution applicant who is ready and willing to implement the approved resolution plan as it is. Although there were some delays in the insolvency resolution process of the Corporate Debtor, attributable to the fact that many appeals came to be filed right upto the SC, now there is a situation where SRA has parked the entire resolution amount in an account separately earmarked for this purpose. This amount is now ready and available for utilisation by various stakeholders.

The Applicant is admittedly pursuing its application for liquidation because the liquidation value is more than the enterprise value. That cannot be a ground for sustaining this application, nor is it in line with the objects of the IBC.

SRA was certainly at fault in not taking steps for implementation of the approved resolution plan after the NCLAT Order, coming up with the condition that until the Vanguard Appeal is decided, it is not in a position to implement the resolution plan.

Judgment

In light of the above observations, the NCLT noted that a mechanical interpretation that once a default is established, then liquidation should be the result, would not subserve the purposes of the IBC. Therefore, the NCLT directed that the management of the Corporate Debtor be transferred to SRA so that the resolution plan be completed. Accordingly, the interlocutory applications were dismissed by the NCLT.

VA View:
In this Judgement, the NCLT has very rightly interpreted and upheld the spirit of the IBC. The NCLT correctly observed that the liquidation value being more than the enterprise value cannot be a ground for sustaining the application, nor is it in line with the objects of the IBC. Sending the Corporate Debtor into liquidation just because the liquidation value is more than the enterprise value, would not be in keeping with the objectives of the IBC.

The IBC is not about maximising value at all costs if it means death of the corporate debtor. Liquidation should be the last resort, when everything else has been attempted and failed. A purposive interpretation is called for when it comes to construction of the terms used in various provisions of the IBC. The whole idea of the IBC is to put the corporate debtor back on its feet for the larger benefit of all the stakeholders and not just the creditors.

For more information please write to Mr. Bomi Daruwala at [email protected]

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