NCLAT Delhi Confirms Corporate Debtor Cannot Be Sent For Liquidation Just Because Liquidation Value Is Higher Than Resolution Plan Value

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the National Company Law Appeal Tribunal (“NCLAT”)main bench, composed of composed of Judge Ashok Bhushan (President), Dr Alok Srivastava (Technical Member) and M/s. Shreesha Merla (Technical member), while ruling on an appeal filed in CFM Asset Reconstruction Pvt. Ltd v SS Natural Resources Pvt. ltd.upheld the order of 06.04.2022 passed by NCLT Kolkata Bench that it was ruled that the debtor company cannot be put into liquidation simply because the liquidation value is higher than the resolution plan value.

Background Facts

Ramsarup Industries Limited (“Debtor Company”) had approached the NCLT, Kolkata (“Arbitration Authority”) under Section 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and therefore been admitted to the Corporate Insolvency Resolution Process (“CIRP”)) on 08.01.2018. Subsequently, a resolution plan was submitted by SS Natural Resources Ltd. (Successful Resolution Requestor/ SRA / Respondent) which was approved by the Committee of Creditors (“CoC”) with 74.41% of the voting rights and also by the contracting authority. An Oversight Agency to oversee the implementation of the successful resolution plan has been constituted consisting of 6 members, namely the Resolution Professional, 2 SRA members, 3 CoC representatives, namely CFM Asset Reconstruction Pvt . ltd. (“Appellant”), Punjab National Bank (“PNB”) and Axis Bank Limited (“Axis Bank”).

The SRA had appealed to the NCLAT claiming that the NCLT had materially altered its resolution plan by imposing additional financial obligations. The NLCAT dismissed the appeal to see an order dated 04.03.2021 and instructed the Supervisory Agency to start implementing the resolution plan, failing which, a request for liquidation of the debtor company was likely to be submitted to NCLT. The SRA appealed to the Supreme Court challenging the order of 04.03.2021, however, the appeal was dismissed to see an order of 04.05.2021 noting the absence of a substantial question of law. Eight such appeals have been filed with the Supreme Court by different stakeholders. Vanguard Credit & Holdings Pvt. ltd. (“Vanguard”) had also appealed to the Supreme Court claiming the land on which the Corporate Debtor plant was located. Therefore, while awaiting the Vanguard’s appeal, the SRA took no action to implement the plan and waited for the Supreme Court’s decision. Eventually, Vanguard’s appeal was also dismissed by the Supreme Court. to see a decree of 02.07.2021.

The Control Agency gathered its 7and meeting of May 20, 2021, during which the SRA had expressed its desire to implement the resolution plan under certain conditions; he also refused to consent to the release of the initial payment to cover the costs of the CIRP; and opposed the use of the performance bond until Vanguard’s appeal is pending in the Supreme Court. Other members of the Oversight Agency have advised the SRA of the need for unconditional implementation of the resolution plan.

Subsequently, the following three appeals were filed with the NCLAT:

  1. IA (IB) n°538/KB/2021- Action brought by CFM-ARC against the SRA and the Control Agency with a view to obtaining the liquidation of the debtor Company;
  2. IA (IB) No.635/KB/2021- Filed by the SRA against the former resolution practitioner and the appellant, seeking direction to cooperate in implementing the approved resolution plan.
  3. IA (IB) No.628/KB/2021- filed by CFM-ARC against the SRA seeking payment of interest for delay in the implementation of the resolution plan by the SRA.

The contested judgment

The contracting authority has authorized IA (IB) No. 635/KB/2021 filed by the SRA and granted 5 days time to transfer the sum of Rs. 322 crores to the account of the debtor company. The other requests were rejected. The contracting authority further considered that IBC’s objective is not to maximize value at all costs, even if that means the death of the business, which will inevitably follow if the business is put in liquidation. The mere fact that the liquidation value is higher than the enterprise value cannot constitute a reason for sending the debtor company into liquidation.

Appeal to NCLAT

CFM-ARC (Appellant) appealed to NCLAT Delhi against the judgment of 06.04.2022 (“Contested Judgment”) alleging that the Judgment Authority erred in law by not putting the Debtor Company into liquidation.

The appellant’s claims

The appellant argued that the contested judgment contravenes the judgment of 04.03.2021 rendered by the NCLAT. When the appeal was dismissed on 04.03.2021, no action was taken by the SRA for the implementation of the resolution plan and, therefore, a liquidation request was filed by the appellant.

It was argued that the contested judgment had been upheld by the Supreme Court to see its order of 04.05.2021 and the Arbitral Authority ignored these orders by rejecting the request for liquidation. The SRA’s plan offer was well below the liquidation value of the assets and the asset maximization objective could only be achieved through liquidation. It was further argued that the appellant has a firm offer of Rs. 525 crores on a 100% cash basis, if liquidation is initiated and the assets of the debtor company are sold.

The appellant also argued that parking an amount of Rs. 320 crores in an account which is not the bank account of the debtor company does not constitute an implementation of the plan. The contested judgment was rendered by the judicial authority in violation of the judgment of the Supreme Court in Ebix Singapore Private Limited v Creditors’ Committee of Educomp Solutions Limited & Anr. in which it has been deemed that the deadlines prescribed under the BAC are of the utmost importance.

The Respondent’s Arguments

The Respondent argued that the Appellant is an assignee who was not born until after the adoption of the Order of 04.03.2021 by the NCLAT, pursuant to an assignment taken by it on 23.04.2021 for a amount of Rs. 255 Crores. The offer of Rs. 525 Crore, as claimed by the caller, is the litigation offer of Orissa Metaliks Pvt. Ltd., which was H-2 in the CIRP whose plan could not be approved. The liquidation is pressed solely to serve the interests of the appellant and of the applicant for resolution who was not retained. It has been argued that the total amount of the offer offered by the SRA was higher than the liquidation value and it has now been ruled by the Supreme Court that the resolution plan can be approved even if it is lower than the value of liquidation.

It was claimed that the SRA had taken steps to implement the plan and deposited the full CIRP costs of Rs. also paid the daily expenses of the debtor company for the month of May 2021.

It has also been argued that the total amount of Rs. 322 crore, which represents the entire resolution plan, was previously parked in the segregated account and after the direction of the contracting authority, the same was transferred to the account of the debtor company within five days and on the date on which the plan is implemented.

NCLAT Decision

The NCLAT Bench observed that there is no lack of intent on the part of the SRA/Respondent to implement the resolution plan. Furthermore, the order of the Tendering Authority granting a period of five days as the last possibility to transfer the amount to the account of the debtor company cannot in any case be considered as contrary to the orders issued by the NCLAT on the date from 04.03.2021.

The bench also relied on judgments rendered by the Supreme Court in Babulal Vardharji Gurjar v Veer Gurjar Aluminum Industries Pvt. ltd. & Anr., (2020) 15 SCC 1, and Swiss Ribbon (P) SA Vs. Union of India, (2019) 4 SCC 17, where it was held that the primary purpose of BAC is to secure the reconstitution and continuance of the debtor company. Consequently, the Debtor Company cannot be liquidated simply because the liquidation value is greater than the value of the Resolution Plan.

The Chamber noted that the Appellant was only born on 23.04.2021, that is to say after the contested judgment was delivered, and is pressing for the liquidation to achieve its due as much as possible. It was held that although some delay has occurred in the implementation of the resolution plan, this fact cannot interfere in the appellate jurisdiction of the NCLAT. The appeal was dismissed by the Chamber to see an order of 19.04.2022.

Case title: CFM Asset Reconstruction Pvt. Ltd v SS Natural Resources Pvt. ltd. & Anr., Company Appeal (AT) (Insolvency) No. 396 of 2022.

Counsel for the Appellant: Mr. Mukul Rohatgi, Mr. Arun Kathpalia, Sr. Advocates with Mr. Manu Nair, Mr. Siddhartha Datta, Ms. Misha, Ms. Suhani Dwivedi, Moulshree Shukla, Mr. Deepanjan Datta Roy, Ms. Trisha Mukherjee, Ms. Surabhi Binani and Mr. Daksh Kadian, lawyers.

Counsel for the Respondent: Dr. Abhishek Manu Singhvi, Lead Counsel with Mr. Ramji Srinivasan, Lead Counsel with Mr. NG Khaitan, Mr. Abhijeet Sinha, Mr. Prateek Kumar, Mr. Shounak Mitra, Ms. Raveena Rai, Mr. Saptarshi Mandal, Mr. Keshav Tibarewalla, Rajshree Chaudhary, Mr. Aditya Shukla and Sumant Batra, attorneys for R-1.

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