The National Company Law Tribunal (“NCLT”), Cuttack in the case of State Bank of India v. Adhunik Metaliks Limited and Others (decided on July 8, 2019) rejected the resolution plan submitted by the resolution applicant on the ground of delay and ordered for liquidation of the corporate debtor.

FACTS
State Bank of India (“State Bank”) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“Code”) for initiation of the corporate insolvency resolution process (“CIRP”) against Adhunik Metaliks Limited and its subsidiary M/s. Zion Steel Limited (“Corporate Debtor”) before the NCLT, Kolkata. In pursuance thereto, Liberty House Group (“Liberty House”) submitted a resolution plan, which was accepted by the committee of creditors (“CoC”) and then was approved by the NCLT, Kolkata.

Liberty House did not take steps to implement the resolution plan. Hence, the CoC filed an application in the NCLT, Kolkata asking for directions to Liberty House for implementation of the resolution plan by making upfront payment or else to pass an order for liquidation of the Corporate Debtor. The NCLT, Kolkata issued notice to Liberty House asking them as to why order of liquidation should not be passed. On an appeal, the National Company Law Appellate Tribunal (“NCLAT”) directed Liberty House to make upfront payment within 30 days. Meanwhile, the NCLT Cuttack was functional and upon failure of Liberty House in making payment, the CoC approached the NCLT, Cuttack for cancellation of the resolution plan and requested to allow them to forfeit the money deposited by Liberty House as part of upfront payment claiming it to be performance security for implementation of the resolution plan.

ISSUE
Whether the resolution plan approved by the NCLT, Kolkata can be rejected for its non-implementation? If so, whether the resolution plan submitted by any other resolution applicant can be considered? If not, whether liquidation can be initiated against the Corporate Debtor?

ARGUMENTS
State Bank and the CoC contended that, since Liberty House failed to make the upfront cash payment of INR 410 crores for more than a year,t here is breach of terms of the resolution plan under Section 74(3) (Punishment for contravention of moratorium or the resolution plan) of the Code, and therefore, the said resolution plan should be rejected. The CoC also requested to forfeit INR 50 Crores deposited by Liberty House as performance security under Regulation 36B(4A) (forfeiture of performance security upon failure in implementation of the resolution plan) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulation, 2016 (“Regulations”).

The CoC argued that an order of liquidation can be passed under Section 33(1) (Initiation of liquidation) of the Code, only if: (i) contingencies are that the adjudicating authority does not receive any resolution plan during 180 or 270 days; or (ii) the adjudicating authority rejects the resolution plan under Section 31 of the Code. Since this case did not fall under any of the aforesaid contingencies, an order of liquidation cannot be passed. Hence, it requested the NCLT, Cuttack to revive the CIRP and allow consideration of the resolution plan submitted by the second highest bidder by excluding the days vested by Liberty House in non-implementation of their plan from the CIRP period.

Liberty House contended that the CoC did not co-operate with them in implementation of the resolution plan as they failed to issue offer letter of equity shares of the Corporate Debtor and thus it was difficult for them to invest funds as per the resolution plan. Liberty House argued that INR 50 crores were deposited as a part of upfront cash payment to show its readiness and willingness in implementation of the resolution plan and thus cannot be forfeited by treating it as performance security.

OBSERVATIONS OF THE NCLT, CUTTACK
The NCLT, Cuttack observed that non-compliance with the order of the NCLAT to make the upfront payment within 30 days amounts to breach of the terms of the resolution plan. Further, the NCLT, Cuttack rejected the arguments of Liberty House by stating that the word “upfront payment” used in the resolution plan cannot be qualified by any condition as sought to be attached subsequently by them.

The NCLT, Cuttack further observed that while approving the resolution plan, the CoC did not ask Liberty House for any performance security for successful implementation of the resolution plan. It also observed that Regulation 36B(4A) of the Regulations was added by an amendment dated April 24, 2019 and thus cannot be applied retrospectively. Hence, the upfront payment of INR 50 crores cannot be forfeited by the CoC.

With regard to reviving the CIRP and considering the resolution plan of the second highest bidder, the NCLT refused to accept the contentions of the CoC. It observed that the resolution plan submitted by second highest bidder was considered earlier and rejected because their investment in the Corporate Debtor was below its liquidation value. The NCLT, Cuttack held that it cannot re-set the clock back to day one. Further, if the second highest bidder was really interested in the affairs of the Corporate Debtor, they still have an opportunity to do so by filing an application under Section 230-232 of the Companies Act, 2013 for merger and amalgamation during liquidation.

DECISION OF THE NCLT, CUTTACK
The NCLT, Cuttack rejected the resolution plan submitted by Liberty House on account of its failure to implement the same and ordered for liquidation of the Corporate Debtor as a going concern under Section 33 of the Code. The NCLT, Cuttack held that the money deposited by Liberty House cannot be said to be performance security and hence, cannot be forfeited by the CoC. However, since Liberty House did not demand the same, the NCLT, Cuttack did not pass any order thereto at this stage.

Vaish Associates Advocates View
The NCLT, Cuttack draws a line between the underlined objective of the Code, that is, to ensure more resolutions than liquidations and basic tenets of the Code wherein a resolution plan once rejected cannot be later considered. An opportunity was given to the CoC to consider all bids received and it had at that point rejected the same by approving the resolution plan submitted by Liberty House.

Thus, in such a scenario, re-setting the clock would go against the spirit of the Code. The NCLT should adopt a stringent approach towards successful bidders who back track on their commitment to implement the plan, and thereby, frustrating the object of the Code to ensure resolution of the corporate debtor within the statutory time limit.

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

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