The National Company Appellate Law Tribunal (“NCLAT”) by order dated May 05, 2021, in the matter of Ramasamy Palaniappan v. Radhakrishnan Dharmarajan and Others [Company Appeal (AT) (CH) (Ins.) No. 19 of 2021] with Chandrasekaran v. Radhakrishnan Dharmarajan and Others [Company Appeal (AT) (CH) (Ins.) No. 20 of 2021] held that, commercial wisdom of the committee of creditors is paramount and could not be interfered with and thereby upheld the order passed by the NCLT, Chennai bench (“NCLT”) dated December 23, 2020 in IA No. 1001 of 2020 in IBA/1459/2019 (“NCLT Order”).

Facts

The NCLT had admitted the petition and the corporate insolvency resolution process (“CIRP”) had been initiated against the respondent no. 3 herein, M/s Appu Hotels Limited (“Corporate Debtor”) by virtue of the NCLT Order. Consequently, Mr. Mukesh Gupta was appointed as interim resolution professional (“IRP”). The IRP made a public announcement on May 08, 2020 and therein the last date for submission of claims was stated as May 21, 2020.

Meanwhile, the suspended director of the Corporate Debtor filed a petition before Madras High Court (“MHC”) challenging the NCLT Order. By an order dated May 20, 2020, the MHC stayed the constitution of the committee of creditors (“CoC”) by three weeks, that is, till June 10, 2020.

Subsequently, on September 04, 2020, the CoC appointed Mr. Radhakrishnan Dharmarajan as the Resolution Professional (“RP”). During the CIRP, due to lockdowns imposed as a result of the Covid-19 pandemic (“Pandemic”), certain activities under CIRP could not be completed. Moreover, the statutory time period of 180 days was to terminate on November 04, 2020. Thereafter, in one of its meetings on November 12, 2020, the CoC passed a resolution with 100% voting to seek an extension of the CIRP period by excluding 179 days (May 05, 2020 to October 31, 2020) from the CIRP period.

The NCLT considering the situation of the Pandemic had allowed an application filed by the RP, under Section 12(2) (time limit for completion of insolvency resolution process), of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Thereby, NCLT allowed the exclusion of such period (May 05, 2020 till October 31, 2020) from the ambit of CIRP to provide benefit available therein in terms of Section 12(2) of IBC, and under Regulation 40 C(special provision relating to time-line) under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016 (“Regulation 40 C”). This NCLT Order was challenged by Mr. Ramasamy Palaniappan, an equity shareholder of the Corporate Debtor and Mr. Chandrasekaran (“Appellants”) before the NCLAT.

Issue

• Whether the RP had committed a categorical violation of Regulation 40 C by not considering the interests of all stakeholders.

Arguments

Contentions of the Appellants:

The Appellants submitted that, the NCLT had invoked the power under Regulation 40 C, and granted a mechanical extension of 179 days from the CIRP period without complete exclusion of the timelines and the activities undertaken during the lockdown period. This would have helped render considerable benefit to all the stakeholders. The petition filed by the financial creditor (respondent no. 2 herein), was admitted by the NCLT during the lockdown period by virtue of the NCLT Order. Subsequently, the IRP was appointed who then invited claims, constituted the CoC and conducted a few meetings of the CoC between June 22, 2020 and October 12, 2020. Thereafter ‘Form G’ (invitation for expression of interest) was issued, and thereby expression of interest was submitted by bidders. There were multiple issues raised, firstly CoC had raised an issue about the value of the resolution plan was far below the liquidation value and secondly, due to the lockdown situation many interested applicants were unable to submit their expression of interest and that it would have been commercially prudent to grant additional time.

The Appellants submitted that, the RP committed violation of Regulation 40 C, by not considering interests of stakeholders and merely sought exclusion of time to complete formalities. The RP had not considered the interests of the Corporate Debtor to be a going concern. The RP should have sought complete exclusion of the timeline and the activities undertaken during the excluded period to render a considerable benefit to all the stakeholders. Regulation 40 C, had been introduced for a much bigger purpose which would be for the benefit of the Corporate Debtor, and the stakeholders of the Corporate Debtor.

The NCLT had extended the CIRP timeline under Section 12(2) of the IBC and not by application under Regulation 40 C (which was fundamentally different from the extension provided under the IBC since the former was to protect the interests of all the stakeholders) and hence, it was mandatory to consider the same before granting exclusion. Further, Section 12(2) of the IBC only permitted 90-days extension, whereas Regulation 40 C qualified for excluding the entire period of inactivity.

Moreover, the RP did not attempt to safeguard the valuable assets of the Corporate Debtor and had presented the plan of the resolution applicant, which took care of just the minimum requirement as prescribed under the IBC, by paying back only the financial, secured, unsecured and operational creditors. The members of the CoC had also felt that the resolution plan amount was far lower than the liquidation value of the Corporate Debtor and hence had even suggested re-invitation of expression of interest and the re-issuance of ‘Form G’. The RP, however, did not take any steps to obtain a better offer and mindlessly proceeded ahead with the CIRP formalities. The RP had acted entirely against the object of the IBC, which was enhancement of entrepreneurship and maximization of value of the Corporate Debtor’s assets while balancing the interests of all stakeholders. Thirdly, there was an entire halt in economic activities during the Pandemic. The RP had not taken into account that the said period could not be conducive to carrying out vital activities such as valuation of the Corporate Debtor and preparation of information memorandum to seek potential resolution applicants to offer their bid.

Contention raised by the RP and the Corporate Debtor:

Regulation 40 C was an enabling provision that allowed the RP to seek approval of the NCLT for exclusion, if any, of the activities which could not be completed due to the lockdown. It was not the case before the NCLT that no process could be initiated during the lockdown period. On the other hand, some of the activities which could not be completed, warranted an exclusion. The NCLT was satisfied with the material evidence placed before it and concluded that such exclusion was required. The grant of time by the NCLT, therefore, could not be made the subject matter of an appeal. The Appellant was questioning the NCLT Order, which had been made based on an application filed with the requisite approval of CoC. It was contended that the entire CIRP had been conducted as per the procedure under IBC. The Appellant who was holding some equity shares in the Corporate Debtor had filed the appeal only to delay the CIRP and to bring about a halt to the approval of the resolution plan. Further, the CoC had approved the resolution plan with a majority of 87.34%, which was now pending consideration of the NCLT.

Observation of NCLAT

The NCLAT noted that the appeal had been filed inter alia on the ground that the RP had violated Regulation 40 C by not considering the interests of all stakeholders and was merely seeking exclusion of time to complete the formalities in the capacity of an RP. It was observed that, the valuation of the Corporate Debtor being INR 1600 crores was unsupported by any evidence. However, the resolution plan amount had been arrived after following the procedure under the IBC. In the case of Maharashtra Seamless Limited. v. Padmanabhan Venkatesh, [(2020) 11 SCC 467] the Supreme Court (“SC”) held that, so long the resolution plan met the other requirements of Section 30(2) of the IBC and was approved by the ‘committee of creditors’, judicial review of such decision of was not permitted. The resolution of the CoC to seek exclusion of time from CIRP was a commercial decision that could not be questioned before the NCLT or the NCLAT.

Considering the contention of the Appellant in respect of Regulation 40 C, it was noted by NCLAT that, the said regulation had been introduced to meet the eventualities of the Pandemic. It was stated that the period of lockdown imposed by the central government in the wake of the Pandemic shall not be counted for the timeline for any activity that could not be completed due to such lockdown about a CIRP. The RP, in this case, had conducted the CIRP in the timeline as per the provisions of the IBC, and when required, had invoked Regulation 40 C. It excluded the timeline for the activities that could not be performed due to the lockdown during the CIRP. Per contra, the activities performed and completed during the lockdown in a given timeline could not be invalidated on account of Regulation 40 C. Moreover, on perusal of the minutes of meeting of the CoC held on November 12, 2020, it appeared that the RP had apprised the CoC about the legal options available – that is, (i) to seek an extension of the timeline for submission of resolution plan or (ii) to make the decision for publication of fresh ‘Form-G’. It was the CoC’s commercial decision that, “no extension of time for submission of Resolution Plan should be done and RP was directed to expedite the valuation process and check the feasibility and viability of the Resolution Plan already submitted and present the eligible Resolution Plan before the CoC for consideration.”

The NCLAT noted that the SC had already laid down in the case of K. Sashidhar v. Indian Overseas Bank and Others [(2019) 12 SCC 150] that the commercial wisdom of CoC was paramount and that judicial intervention was not permitted. Therefore, the decision of the CoC to not seek extension of the timeline for submission of resolution plan was a commercial decision, which was not justiciable.

The NCLAT observed that, the Appellant, moreover, was not a necessary party and the NCLT on being satisfied with the reasons adduced by the RP and material evidence placed before it had granted an exclusion. The NCLAT observed that, the allegation that the CIRP had been conducted in undue haste during the lockdown could not be a ground for the Appellant to challenge the NCLT Order, merely because Regulation 40 C was introduced. Further the contention that, introduction of Regulation 40 C would make it imperative for the RP to invoke it for extending the timeline as a matter of routine was incorrect.

The NCLAT further observed that, the RP had conducted the CIRP as per timelines. When required, the RP had invoked Regulation 40 C and sought exclusion of 179 days while calculating the CIRP period. In addition, it was also noted that Section 12(2) of the IBC empowered the NCLT to extend the timeline for completion of CIRP beyond 180 days on the basis of the resolution of the CoC which is passed with a minimum 66% of voting share. The second proviso to Section 12(3) of the IBC further empowered the NCLT to extend the timeline for completion of CIRP up to 330 days. The SC’s decision in Kalpraj Dharamshi v. Kotak Investment Advisors Limited [2021 SCC Online SC 204] was also considered, herein, the SC had held that commercial wisdom of CoC was not to be interfered with, excepting the limited scope as provided under Sections 30 and 31 of the IBC. In this case, the SC had also noted that though there had been material irregularity in exercise of powers by RP, all actions of the RP have the seal of approval of the CoC.

Decision of NCLAT

In this case, even though Regulation 40 C could have been applied for exclusion of 179 days on account of the unprecedented situation created by the Pandemic and some of the financial creditors had opined for fresh publication of ‘Form G’ for the invitation of expression of interest, the CoC had unanimously decided only for seeking exclusion of 179 days, that is from May 05, 2020 to October 31, 2020, for completion of CIRP. The CoC, also, under its commercial wisdom, did not prefer for publication of ‘Form-G’ afresh to invite an expression of interest. Therefore, it was held that, such a decision of the CoC was not justiciable, and the decision of the NCLT warranted no interference.

VA View:

The NCLAT reiterated that the commercial wisdom of the CoC has to be given paramountcy and could not be interfered with. It has been recognized by the SC that the CoC acts on the basis of thorough assessment and examination of the resolution plan. To intervene, in such a case, would unfold the commercially thought-out decision(s) made by the CoC. It is very clear from the facts and as has been noted by the SC in a catena of judgements, that, the legislature, consciously has not provided any ground to challenge the CoC’s commercial wisdom.

The RP need not to invoke Regulation 40C as a matter of routine in lieu of Section 12(2) of the IBC, since it provides for an exclusion of the timeline (for completion of CIRP) for any activity that could not have been performed given the lockdown due to the Covid-19 outbreak.

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

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