Asrec (India) Limited vs Divyesh Desai

Divyesh Desai .... Respondent

B2, 402 B, Marathon Innova, Off. Ganpatrao Kadam Marg, Lower Parel, Mumbai-400013.

Present

For Appellant: Mr. Saurav Jain, Advocate

For Respondent: Mr. G. Karthikeyan and Mr. Anurag Anand, Advocates

Judgment (Date: 05 .08.2022)

[ Per.: Dr. Alok Srivastava, Member (Technical)]

1. This appeal has been filed under section 61(1) of the

Insolvency & Bankruptcy Code, 2016 (hereinafter called "IBC") by

the Appellant, who is aggrieved by the order dated 02.12.2019 Company Appeal (AT) (Ins.) No. 303 of 2020 Page 1 of 8 (hereinafter called "Impugned Order") passed in MA 520/2019 in

C.P. (IB) 1339 (MB)/2017 by the National Company Law Tribunal,

Mumbai Bench (Adjudicating Authority).

2. The Adjudicating Authority vide Impugned Order has held

that the question of the right of second charge holder to claim

priority over the first charge holder has been answered in the court

and, inter-alia, directed the liquidator 'to distribute the funds strictly

adhering to the ratios as arrived by him for the first charge holder as

per the Code. If at all any grievance on the part of the second charge

holder, they may approach the competent court but they have no

authority to approach this Bench. MA 520/2019 is disposed of

accordingly.'

3. The Appellant has prayed for setting aside the Impugned

Order dated 2.12.2019 and for directing the Liquidator to provide to

the Appellant bifurcation of the amounts to be distributed to the

lenders and follow 'waterfall mechanism' as provided under section

53 of the IBC for distribution of funds.

4. We heard the oral arguments advanced by the Learned

Counsels for Appellant and Respondent and also perused the

record.

5. The Learned Counsel for Appellant has argued that three

Joint Lenders meetings were held on December 13, 2010, December Company Appeal (AT) (Ins.) No. 303 of 2020 Page 2 of 8 15, 2011 and July 7, 2017 and in accordance with the minutes of

the meetings, the ratio of sharing of funds between the Term Lenders

and Working Capital lenders which was to be obtained from sale

proceeds of corporate debtor's assets, between the first and second

charge holders was decided as 70:30 in the meeting dated December

13, 2010, which was later revised to 80:20 in the meeting dated

17.7.2017. He has further argued that he had approached the

Adjudicating Authority through MA No. 520/2019 for seeking

clarification regarding bifurcation of the amounts to be distributed

to the lenders and for adhering to the 'waterfall mechanism' as

prescribed under section 53 of the IBC for distribution of funds to

the lenders. He has also argued that the Impugned Order has

neither accepted his prayer nor any bifurcation in distribution of

funds has been made clear to him as the Impugned Order is not

clear on these points.

6. The Learned Counsel for Respondent (Liquidator) has argued

that the Appellant had filed his claim with delay. He has further

argued that the minutes of the meeting of the joint lenders held on

July 7, 2017 (attached at Annexure A/8 - pp. 172-173 of the appeal

paperbook) only records a point of discussion in relation to

distribution of sale proceeds arising out of action under SARFAESI

Act, and moreover, the principle of distribution of funds to first and

second charge holders in 80:20 ratio, which is claimed by the Company Appeal (AT) (Ins.) No. 303 of 2020 Page 3 of 8 Appellant to have been decided in the meeting of lenders, was

discussed between the Term Lenders and Working Capital Lenders

and the Appellant did not agree to this ratio, as is evident from his

letters dated July 11, 2017 and July 24, 2017. He has thus claimed

that this ratio remained only a point for discussion and there was

no agreement between all lenders regarding distribution of sale

proceeds in accordance with 80:20 or 70:30 ratio. He has further

argued that the liquidator had proposed distribution of sale

proceeds derived from sale of assets of the Corporate Debtor

according to section 53 of IBC as the proceeding of liquidation was

being carried out under the IBC. Later, in view of the objection of

the Appellant sent vide email dated January 1, 2019, the liquidator

sent an email dated January 5, 2019 to all the lenders seeking their

consent on following the 80:20 ratio in distribution of sale proceeds

between first and second charge holders. He has pointed out that,

in this regard, the representative of Stressed Assets Stabilization

Fund (SASF) of IDBI, UTI and LIC of India opined through respective

email communications that provisions under IBC should be followed

for distribution of sale proceeds, as proceedings in NCLT are taking

place under IBC. These communications are attached at pgs. 61,

65 and 69 respectively of the appeal paperbook. The Learned

Counsel of the Respondent has also submitted that the proposed

distribution structure of the liquidation estate of Precision Fasteners

Company Appeal (AT) (Ins.) No. 303 of 2020 Page 4 of 8 Ltd. (corporate debtor) was communicated to the stakeholders vide

email dated December 9, 2019 (attached at pp. 71-74 of the appeal

paperbook) wherein the detailed proposed distribution structure,

which was in accordance with provisions of section 53 of the IBC)

was communicated to the lenders, and therein the claim of ASREC

(India) Limited/Appellant was fixed at 18.8%. amongst second

charge holders. He has also claimed that the Appellant was

communicated about his share through email dated December 9,

2018.

7. We perused the prayer made by the Appellant in MA

520/2019 (attached at pp. 29-38 of the appeal paperbook), wherein

the following prayer is made:-

"a. That the Liquidator be directed to provide bifurcation of

the amounts to be distributed to the lenders;

b. That, the liquidator be directed to follow waterfall

mechanism under section 53 of the Insolvency and

Bankruptcy Code for distribution of funds to the

lenders;

c. The liquidator also be directed to consider the

consensus took placed amongst the term lenders and

working capital and agreed upon between them the

sharing pattern of the proceed at 70:30 ratio Company Appeal (AT) (Ins.) No. 303 of 2020 Page 5 of 8 respectively their by distributing applicant share a sum

of Rs. 3.06 crores."

8. The Impugned Order mentions that the question regarding

the distribution has been answered in the Court, but it does not

expand on the actual 'answer'. Another prayer made by ASREC

(India) Ltd./Appellant to the Adjudicating Authority in MA No.

520/2019 was regarding the sharing of sale proceeds in the ratio

70:30 and keeping the Appellant's share at Rs.3.06 crores. This

particular issue has not been dealt with in the Impugned Order, and

it therefore remains unclear whether this prayer was at all

considered and decided in a well-reasoned and logical manner.

9. Looking at the reliefs sought by the Appellant in MA No.

520/2019 and those in the present appeal, we are of the view that

the Impugned Order, by which MA 520/2019 was disposed of, does

not provide any clarity on how the prayers made in MA 520/2019

have been dealt with. It cannot be gainsaid that the Appellant, who

is a stakeholder in the liquidation process, is entitled to know his

share in the distribution matrix and how it has been arrived at. The

Impugned Order falls short of providing a reasoned answers to the

Applicant's (ARSEC (India) Limited) prayers.

Company Appeal (AT) (Ins.) No. 303 of 2020 Page 6 of 8

10. The Hon'ble Supreme Court in the matter of M/s Steel

Authority of India Ltd vs Sales Tax Officer, Rourkela-I, Circle

2008 (9) SCC 407 held as follows:-

"10. Reason is the heartbeat of every conclusion. It introduces clarity in an order and without the same it becomes lifeless.

11. ............."Reasons substitute subjectivity by objectivity. The emphasis on recording reasons is that if the decision reveals the "inscrutable face of the sphinx", it can, by its silence, render it virtually impossible for the courts to perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. Right to reason is an indispensable part of a sound judicial system; reasons at least sufficient to indicate an application of mind to the matter before court. Another rationale is that the affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made; in other words, a speaking-out. The "inscrutable face of the sphinx" is ordinarily incongruous with a judicial or quasi-judicial performance."

11. In another matter of Madhya Pradesh Industries Ltd. vs.

Union of India [AIR 1966 SC 671], the Hon'ble Supreme Court

held as follows:-

"In the context of a welfare State, administrative tribunals have come to stay. Indeed, they are the necessary concomitants of a Welfare State. But arbitrariness in their functioning destroys the concept of a welfare State itself. Self-discipline and supervision exclude or at any rate minimize arbitrariness. The least a tribunal can do is to disclose its mind. The compulsion of disclosure guarantees consideration. The condition to give reasons introduces clarity and excludes or at any rate minimizes arbitrariness; it gives satisfaction to the party against whom the order is made; and it also enables an appellate or supervisory court to keep the tribunals within

Company Appeal (AT) (Ins.) No. 303 of 2020 Page 7 of 8 bounds, A reasoned order is a desirable condition of judicial disposal."

12. On perusing the Impugned Order in the light of the dictum

laid down by the Hon'ble Supreme Court in the above-mentioned

judgments, we are of the view that the Impugned Order falls short

in providing a reasoned basis and clarity to the prayers of the

Appellant made in MA 520/2019.

13. We, therefore, remand the case to the Adjudicating Authority

for providing an appropriately reasoned and clear order in the light

of prayers made in MA 520/2019 after giving due opportunity of

hearing to the parties. Since the corporate debtor is in final stage

of liquidation, it is desirable that the Adjudicating Authority may

pass such an order as expeditiously as may be possible. With these

directions the appeal is disposed of.

14. No order as to costs.

(Justice M. Satyanarayana Murthy) Member (Judicial)

(Mr. Kanthi Narahari) Member (Technical)

(Dr. Alok Srivastava) Member (Technical) New Delhi 5th August, 2022 /aks/

Company Appeal (AT) (Ins.) No. 303 of 2020 Page 8 of 8