The National Company Law Tribunal, Hyderabad (“NCLT”), in the matter of Viceroy Hotels Limited [CP (IB) No. 219/7/HDB/2017], vide its order dated June 9, 2023, has rejected the resolution plan approved by the Committee of Creditors (“CoC”) on account of non-compliance of Regulation 36B (4A) (Request for resolution plan) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) since the performance bank guarantee (“PBG”) submitted by the resolution applicant expired prior to the duration of plan implementation schedule (“Schedule”).

Facts

Dr. Govindarajula Venkata Narasimha Rao (“Resolution Professional/ Applicant”) filed an application, I.A. No. 1343 of 2022, under Sections 30(6) (Submission of resolution plan) and 31 (Approval of resolution plan) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) read with Regulation 39(4) (Approval of resolution plan) of the CIRP Regulations and Rule 11 (Inherent Powers) of the National Company Law Tribunal Rules, 2016, seeking approval of the resolution plan submitted by Anirudh Agro Farms Limited (“Resolution Applicant/ Anirudh”) pursuant to approval by CoC of Viceroy Hotels Limited (“Corporate Debtor”) with 95.82% votes.

By way of background, NCLT admitted the Corporate Debtor into corporate insolvency resolution process (“CIRP”) by order dated March 12, 2018, pursuant to Asset Reconstruction Company (India) Limited (“ARCIL”) having filed a petition under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of IBC. Further, Mr. K. K. Rao (“Erstwhile RP”) was appointed by the NCLT as the interim resolution professional of the Corporate Debtor and his appointment was confirmed by the CoC.

Pursuant to the public announcement made by the Erstwhile RP and submission of claim by various creditors, the Erstwhile RP constituted the CoC comprising of financial creditors of the Corporate Debtor. The CoC evaluated the resolution plans submitted by prospective resolution applicants, namely: (a) ARCIL; (b) Unison Hotels Private Limited; and (c) CFM Asset Reconstruction Private Limited (“CFM”).

Subsequently, the CoC approved the resolution plan submitted by CFM with 88% voting rights and accordingly, the Erstwhile RP filed an application, I.A. No. 281 of 2019, seeking approval of the resolution plan submitted by CFM. However, it was rejected by NCLT, vide order dated September 1, 2021, on the ground that an asset reconstruction company would not be capable of implementing the resolution plan without prior approval sought from the Reserve Bank of India.

In view of the above-mentioned, the CoC preferred an application, I.A. No. 27 of 2022, before the NCLT, seeking directions for conducting a CoC meeting for change of the Erstwhile RP. Accordingly, by order dated March 22, 2022, the NCLT directed the Erstwhile RP to conduct a CoC meeting. In view of the aforesaid order, the Erstwhile RP conducted the 19th CoC meeting on March 28, 2022, whereby a resolution was passed to replace the Erstwhile RP with the Resolution Professional, which was subsequently confirmed by NCLT by order dated April 13, 2022.

Subsequently, the Resolution Professional preferred an application, I.A. No. 443 of 2022, seeking permission of the NCLT to issue a revised Form G inviting the prospective resolution applicants to submit their respective Expressions of Interest (“EoI”). The aforesaid application was allowed by the NCLT with a direction to the Resolution Professional to complete the CIRP within a period of 90 days from the date of the order, that is, June 14, 2022. Pursuant to order dated June 14, 2022 passed by the NCLT, the Resolution Professional gave effect to publishing the revised Form G on June 18, 2022, thereby inviting the prospective resolution applicants to submit their respective EoIs by July 4, 2022 and the last date for submission of resolution plan being August 8, 2022. 27 EoIs were received from various entities and they were all provided with the request for resolution plan (“RFRP”) and information memorandum as well as access to the virtual data room. Eventually, five entities submitted their resolution plans which were placed before the CoC in the 23rd CoC meeting. Those aforesaid five entities were: (a) Innopark (India) Private Limited (“Innopark”); (b) Anirudh; (c) Terminus Hotels and Resorts Private Limited (“Terminus”); (d) Kailash Darshan Housing Development (Gujarat) Private Limited (“KDHDPL”); and (e) Unison Hotels Private Limited (“Unison”). In the meeting it was also resolved to file an application seeking extension of 60 days to complete the CIRP of the Corporate Debtor, which was allowed by the NCLT by order dated September 2, 2022, thereby extending the CIRP period until November 11, 2022.

Further, considering that the valuation of the Corporate Debtor was carried out more than four years ago, in the 24th CoC meeting held on September 7, 2022, it was further resolved to carry out a fresh valuation, which would enable to CoC to evaluate the resolution plan, keeping in mind the current value of the assets. Accordingly, the Resolution Professional carried out a fresh valuation.

Two prospective resolution applicants, namely, Unison and Terminus backed out from the process and out of the remaining three entities, only KDHDPL and Anirudh submitted the revised resolution plans in light of modifications suggested by the CoC. Further, the CoC observed that the resolution plan of Innopark was a conditional plan and that the revised resolution plan of KDHDPL was not compliant with the RFRP. After evaluating the resolution plan submitted by Anirudh on qualitative and quantitative aspects as well as from the perspective of Section 29A (Persons not eligible to be resolution applicant) of the IBC, the resolution plan submitted by Anirudh was finally approved by the CoC with 95.82% voting share and accordingly, the Resolution Professional issued a letter of intent on November 10, 2022. Pertinently, Anirudh furnished a PBG of INR 16.85 Crores to the Resolution Professional as stipulated in the RFRP and as per the terms of the letter of intent.

Contour of the Resolution Plan

Anirudh provided an amount of INR 168.50 Crores to the stakeholders of the Corporate Debtor and included buy-back of equity from the assenting financial creditors at a guaranteed amount of INR 17 Crores. Further, the Resolution Plan provided for payments to be made in five tranches within the stipulated timelines. More particularly, upfront cash amounting to INR 51.50 Crores was to be paid as on the trigger date, whereby trigger date was defined under the Resolution Plan, whereas the remaining amounts were to be paid in four other tranches as per the timelines provided under the Resolution Plan.

Further, the Resolution Plan provided that the monitoring committee, which shall comprise of two representatives of the CoC and three members nominated by Anirudh, shall supervise the implementation of the Resolution Plan under the supervision of the NCLT up to the trigger date.

Compliance of mandatory contents of Resolution Plan as per IBC and CIRP Regulations

The Resolution Professional had conducted a compliance check of the Resolution Plan submitted by Anirudh in accordance with IBC as well as CIRP Regulations and accordingly submitted Form H as per Regulation 39(4) of the CIRP Regulations. Further, it was informed to the NCLT that Anirudh had submitted an affidavit declaring itself to be eligible in terms of Section 29A of the IBC.

Submissions made by the Applicant

The Applicant submitted that the Resolution Plan is in compliance with Section 30(2) of the IBC. It was submitted that the Resolution Plan provides for payment towards CIRP Cost on priority as stipulated in Section 30(2)(a) of IBC. Further, in the event the cash flow/ cash balance of the Corporate Debtor is insufficient to discharge the outstanding CIRP costs, the balance amount of the outstanding CIRP costs shall be brought in by Anirudh over and above the upfront cash. The Applicant further submitted that the Resolution Plan provides for payment to operational creditors in priority in the manner as provided under Section 30(2)(b) of the IBC. Further, it was submitted that the Resolution Plan provides for payment to the dissenting financial creditors proportionately from the upfront cash and/or the total Resolution Plan amount on priority to the payment to the assenting financial creditors in each tranche and shall not be less than the amount that would be payable to such financial creditors in accordance with Section 53(1) (Distribution of assets) of the IBC in the event of liquidation of the Corporate Debtor.

The Applicant also demonstrated that the Resolution Plan is in compliance of Regulation 38 (Mandatory contents of the resolution plan) of the CIRP Regulations. It provides for payment of 0.9% of the admitted claims of the operational creditor on priority. Further, the Resolution Plan comprises of a declaration that it has been prepared taking into consideration the interest of all stakeholders of the Corporate Debtor and the objectives behind enactment of the IBC. The Resolution Plan also had a declaration that neither the resolution applicant nor any of his related party has either failed or contributed to the failure of the implementation of any other approved resolution plan.

Issue

Whether a resolution plan approved by the CoC can be rejected/ disapproved by the adjudicating authority for non-compliance of Regulation 36B (4A) (Request for resolution plans) of the CIRP Regulations.

Observations of the NCLT

The NCLT observed that in the case of K. Shashidhar v. Indian Overseas and Others [Civil Appeal No. 10673 of 2018], the Supreme Court (“SC”) held that if the CoC has approved a resolution plan, the resolution professional is obligated to place that plan before NCLT and if NCLT is satisfied that the resolution plan approved by the CoC meets the requirements of the IBC, in such a scenario, the NCLT has to approve the resolution plan, without digressing into any other aspect. Similarly, in the matter of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others [(2020) 8 SCC 531], the SC held that the limited judicial review available to NCLT has to be restricted within the purview of Section 30(2) of IBC and it cannot trespass upon a business decision of the CoC.

In view of the above-mentioned judgments, the NCLT observed that it is fully conscious of the need to keep judicial intervention at a bare minimum while approving a resolution plan. However, the NCLT cannot overlook the non-compliance of a mandatory provision of law by the successful resolution applicant. In this regard, the NCLT relied upon the judgment of the SC in the matter of M.K. Rajagopalan v. Dr. Pariasamy Palani Gounder and Another [Civil Appeal Nos. 1682-1683 of 2022] (“Rajagopalan Judgment”), whereby the SC had clearly observed that the principles underlying the decisions of the court respecting the commercial wisdom of CoC cannot be over-expanded to brush aside a significant shortcoming in the decision making of the CoC when it had not duly taken note of operation of any provision of law for the time being in force.

In the present case, basis perusal of compliance certificate (Form-H) filed by the Resolution Professional, it is clear that in compliance of the RFRP, the Resolution Applicant has submitted a PBG of INR 16.85 Crores, issued by Kotak Mahindra Bank Limited for a period of six months commencing from November 10, 2022. The NCLT observed that Regulation 36B 4(A) of the CIRP Regulations clearly provides that the PBG shall cover the Schedule. However, the PBG furnished by the Resolution Applicant did not cover the Schedule duration and Anirudh filed a clarificatory undertaking stating that Anirudh has proposed a payment to all creditors in five tranches as per the Resolution Plan and the payments made under any prior tranches are liable to the forfeited if Anirudh fails to make payments under the subsequent tranches as per the Resolution Plan. However, the NCLT was not satisfied with the above-mentioned clarification and observed that such unilateral undertaking cannot result in extending PBG beyond six months from November 10, 2022. Hence, the NCLT observed that the PBG had expired by efflux of time and the same was not extended by Anirudh. Therefore, as on date, the PBG is non-est in the eyes of law and therefore, the non-compliance of Regulation 36B (4A) of the CIRP Regulations is apparent.

Decision of the NCLT

In view of the above-mentioned findings, the NCLT held that the Resolution Plan, being in breach of statutory provision, is liable to be rejected. The NCLT observed that, as per Section 33(1)(b) of the IBC, rejection of a resolution plan can be a ground for initiation of liquidation process of the Corporate Debtor. However, the NCLT directed for continuation of the CIRP and thereby, directed the Resolution Professional to issue a fresh Form-G inviting EoIs and complete the CIRP as expeditiously as possible, but no later than sixty days from the date of the order.

VA View:

By way of pronouncing the present judgment, NCLT has set the much needed precedent on the issue of expiry and non renewal of performance bank guarantee. Further, this judgment makes it amply clear that strict compliance of Regulation 36B (4A) of the CIRP Regulations must be maintained and the performance bank guarantee provided in terms of the aforesaid regulation must cover the Schedule duration of the Resolution Plan. However, this issue is no more res integra and is now a trite law that non compliance of Regulation 36B (4A) of the CIRP Regulations shall lead to rejection of a resolution plan.

Hence, this judgment will ensure that going forward, all the resolution applicants will be vigilant and mindful that performance security furnished by them must meet the requirement as envisaged under Regulation 36B (4A) of the CIRP Regulations and in particular that the duration of the performance security shall be no less than the Schedule duration of the resolution plan.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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