Edelweiss Asset Reconstruction ... vs Sai Regency Power Corporation Pvt. Ltd. ...

[Arising out of Order dated 21.08.2019 passed by National Company Law Tribunal, Division Bench, Chennai in MA/872/2019 in IBA/92/2019]

IN THE MATTER OF: Before NCLT Before NCLAT

Edelweiss Asset --- Appellant Reconstruction Company Limited, Edelweiss House, Off CST Road, Kalina, Santacruz (East), Mumbai - 400098

Versus

1. Sai Regency Power Applicant Respondent No.1 Corporation Pvt. Ltd. Represented through Resolution Professional Mr. G. Ramachandran, 8-2-293/82/A/431/A, Road No.22, Jubilee Hills, Hyderabad, Telangana 500 033

Also at: 2nd Floor, Crown Court, No.128, Cathedral Road, Chennai - 600086

2. Committee of Creditors Respondent Respondent No.2 of M/s. Sai Regency Power Corporation Private Limited C/o Sai Regency Power Corporation Limited 8-2-293/82/A/431/A, Road No. 22, 2

Jubilee Hills, Hyderabad, Telangana 500 033

For Appellant: Shri Sanjeev Sen, Sr. Advocate with Shri Arjun Krishnan, Shri Sumit Srivastava, Ms. Khushboo Mittal, Shri Soumo Palit and Shri Sayan Ray, Advocates

For Respondent: Counsel for Respondent present but did not mark appearance

JUDGEMENT

(20th December, 2019) A.I.S. Cheema, J. :

1. The Insolvency Resolution Process has been filed against M/s. Sai

Regency Power Corporation Pvt. Ltd. (Corporate Debtor) which is pending.

In the CIRP process, Committee of Creditors (COC - in short) has been

constituted in which the Appellant - Edelweiss Asset Reconstruction

Company Limited (EARC - in short) is having 25% voting share. In the 6th

meeting of COC dated 2nd August, 2019 (Annexure A-3), the Appellant -

"EARC" participated in the meeting. COC took decision regarding interim

finance with regard to:-

"Agenda B2 - To approve interim finance In furtherance to the discussion in Agenda A6, the RP requested the members of the CoC to vote on the following resolution through e-voting facility as per the instructions provided

E-Voting To approve interim finance Agenda - B2

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RESOLVED THAT pursuant to the provisions of the Insolvency and Bankruptcy Code, 2016 and in accordance with rules and regulations made thereunder, the members of the CoC hereby approve interim finance as defined under section 5(15) of the Insolvency and Bankruptcy Code, 2016, amounting to INR 35,25,80,379 for the non-fund based requirement towards GAIL and ONGC.

FURTHER RESOLVED that Mr. G. Ramachandran, RP, be and is hereby authorized to do all such acts and deeds as maybe required for giving effect to the above said resolution.

"

The Appellant - EARC objected to the resolution but it is stated that

the resolution was passed by COC with 75% voting.

2. The Resolution Professional filed MA/872/2019 (Annexure A-10) in

the Insolvency Proceedings IBA/92/2019 before the Adjudicating

Authority (National Company Law Tribunal, Division Bench, Chennai)

under Section 60(5)(c) read with Section 25(1), 25(2)(c) and 28(1)(a) of the

Insolvency and Bankruptcy Code, 2016 (IBC - in short). It was mentioned

that the CIRP process has been initiated vide Order dated 27.03.2019 on

the basis of Application under Section 10 of IBC. The RP mentioned that

the Corporate Debtor is engaged in the business of generation and sale of

electricity from its Gas based Combined Cycle Power Plant. In order to

generate electricity from the project, Corporate Debtor requires

approximately 2,74,000 SCMD gas per day and, inter alia, was procuring

its major requirement of gas from Oil and Natural Gas Corporation (ONGC

- in short) in terms of Gas Supply Agreement dated 19th April, 2017 and

balance quantity of gas was being procured from GAIL India Ltd. in terms

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of Gas Supply Agreement dated 24th December, 2015. On 30th April, 2019,

the Agreement between Corporate Debtor and ONGC completed its term.

On mutual understanding, ONGC continued to supply gas to the Corporate

Debtor till 10th May, 2019 but now had stopped supply of gas under the

erstwhile Agreement. The RP entered into fresh negotiations with ONGC

but it was informed that RP would have to participate in fresh tender/bid

for gas supply. Inter alia, it was mentioned in the Application to the

Adjudicating Authority that the Agreement with GAIL was due to expire on

6th August, 2019 and GAIL had asked the Corporate Debtor to open/renew

and submit Standby Irrevocable Resolving Letter of Credit with Face Value

as mentioned. That, GAIL further clarified that aggregate liability of issuing

bank under the Letter of Credit should also be for the amount as

mentioned. The RP then referred to the 6th meeting of COC and the decision

taken. RP stated that in spite of decision of COC, Financial Creditor - M/s.

Edelweiss Asset Reconstruction Company Limited (the Appellant) and Axis

Bank were reluctant to release Letter of Comfort to the lead bank - M/s.

Punjab National Bank which was willing to disburse interim finance since

the resolution has been passed with the approval of 75% voting share of

COC.

It is now stated at the time of Appeal that Axis Bank has also issued

Letter of Comfort and only the Appellant has not done so. In the MA filed

before the Adjudicating Authority, the relief sought was:-

"Issue a certification that approved Interim Finance and any costs related to Interim Finance,

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since it forms part of the insolvency resolution process cost, has to be shared between all the members of the Committee of Creditors, in the proportion of their voting rights".

The Adjudicating Authority passed the following Order for reasons

recorded and allowed the Application, which reads as under:-

"4. It is obvious that all the members of the CoC are bound by the resolution approved by the CoC with requisite majority as mentioned under the code. That being so, all the members of the CoC including M/s. Edelweiss Asset Reconstruction Company Limited and Axis Bank shall release the Letter of Comfort in favour of the lead bank M/s. Punjab National Bank within 24 hours from thereof or on or before by 5.00 p.m. on 22.08.2019. The reason for passing this order even without waiting for the appearance of the Financial Creditors, who are not inclined to release the Letter of Comfort is in the event if this interim finance is not released, the Corporate Debtor will not be in a position to participate in the Tender for fuel for the Power Plant for which the last date is 23.08.2019.

5. The Resolution Professional having further stated that, to participate in the Tender, the Corporate Debtor is required to pay Security Deposit of ₹16,61,77,689 to ONGC through the Bank Guarantee, we are constrained to pass this order on the mentioning made by the Resolution Professional. Another reason for passing this order on mentioning is, since the CoC has decided and approved the same for approving interim finance on proportionate basis, it has to be presumed that all the CoC members are aware of the Resolution passed by the CoC on 02.08.2019 for granting interim finance of ₹35,25,80,329.

6. In view of the same, this application is hereby allowed with a direction to the CoC members

Company Appeal (AT) (Ins) No.887 of 2019 6

including M/s. Edelweiss Asset Reconstruction Company Limited and Axis Bank to release the Letter of Comfort within 24 hours from hereof or else by 5.00 p.m. on or before 22.08.2019.

7. It is a going concern running with 100 employees, in case this interim finance has not been released, the Corporate Debtor will come to a grinding halt, therefore, this application is fit for the relief sought, therefore, we held that this application is fit for granting the reliefs as sought by the Resolution Professional."

3. Against developments as above, the Appellant - EARC has filed this

Appeal and it is claimed that in view of amendment to Section 30(4) of IBC

read with Section 52(8) of IBC, Insolvency Resolution Process costs which

includes interim finance can only be recovered from secured creditors and

not from unsecured creditors like Appellant. It is also claimed that the

Appellant is unsecured creditor and commercially it is injudicious in

precarious condition for the Appellant to incur additional liabilities in the

form of interim finance/Letter of Comfort and the Appellant cannot be

compelled to do so. According to the Appellant, the COC is free to raise

CIRP cost/interim finance from external sources or willing Financial

Creditors which may be repaid in priority as per Section 53 of IBC. The

other ground raised is that the RP moved the Adjudicating Authority just

two days before the last date of the gas supply tender and the Impugned

Order was passed without giving opportunity of being heard to the

Appellant and thereby principles of natural justice were violated. The RP

in the COC meeting wanted that each of the COC member should provide

Letter of Comfort to provide guarantee in proportion to their voting share

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in the event of invocation of the Letter of Comfort to be furnished by Punjab

National Bank. According to the Appellant, it declined to provide the Letter

of Comfort because the Corporate Debtor was highly leveraged and there

was no point in providing additional interim finance to the Corporate

Debtor for procuring gas and overhauling. The Appellant claims that there

would be little or no value maximization even if the interim finance could

be provided. The Appellant claims that in view of the amendment in IBC,

it is for the secured creditors who ought to contribute, if at all, for the

provision of interim finance and there was little hope of realisation for the

Appellant (unsecured creditor) through CIRP. According to the Appellant,

only the consenting members of the COC ought to be directed to provide

Letters of Comfort to raise interim finance.

4. The learned Senior Counsel for the Appellant has argued the Appeal

referring to averments made in Appeal. According to him, the Appellant

cannot be forced or compelled to pay. He referred to the various provisions

under the IBC relating to raising of interim finance and with regard to

keeping the Company as a going concern to submit that there was nothing

on the basis of which dissenting unsecured Financial Creditor could be

compelled to pay or part with money. At the time of hearing, we had made

a query to the learned Senior Counsel as to what happens if all the

Financial Creditors or majority of them were to say that they will not

contribute towards CIRP costs and to keep the Company a going concern

to maximise value. The learned Senior Counsel stated that the Company

would go in liquidation but, however, added that the Appellant being

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unsecured Financial Creditor could not be forced to infuse further capital.

The learned Counsel referred to the COC Resolution and the objection

which had been raised by the Appellant in the COC meeting. It is argued

that Section 14(2) while dealing with Moratorium, provides that the supply

of essential goods or services to the Corporate Debtor as may be specified

shall not be terminated or suspended or interpreted during Moratorium.

The learned Counsel then referred to Regulation 32 of "Insolvency and

Bankruptcy Board of India (Insolvency Resolution Process for Corporate

Persons) Regulations, 2016" ('Regulations' - in short) to submit that essential

supplies mean - (1) electricity, (2) water, (3) telecommunication services

and (4) information technology services, to the extent they are not direct

input to the output produced or supplied by the Corporate Debtor.

According to the Counsel, the decision taken by the COC for entering into

further arrangement with ONGC/GAIL for supply of gas was not essential

service and the Appellant could not be forced to make provisions so that

Company remains functional. Except for essential services, it is claimed

that Appellant could not be compelled.

5. Against this, the learned Counsel for Resolution Professional referred

to the resolution itself. It is stated that it was "non-fund based requirement

towards GAIL and ONGC". According to him, there is nothing that the

Appellant was being made to pay but only Letter of Comfort was to be

executed. The learned Counsel referred to various provisions of the IBC to

submit that it is the responsibility of the IRP/RP to keep the Corporate

Debtor a going concern. When the RP has taken a decision that interim

Company Appeal (AT) (Ins) No.887 of 2019 9

finance needs to be raised so as to ensure that the Corporate Debtor

remains a going concern so as to maximise the value of the Corporate

Debtor, the Appellant should not have objected and cannot resist liability

when it is part of the COC. The COC decision taken with requisite voting

majority is binding on everybody including the Appellant. The Counsel

referred to various provisions of IBC which permit raising of interim

finance to keep the Corporate Debtor a going concern till resolution

becomes possible. The primary object of IBC is to make efforts for

resolution and not liquidation.

6. The learned Counsel for the Respondent further submitted that there

was urgency for seeking orders of the Adjudicating Authority due to the

approach of the Appellant which was not ready to release the Letter of

Comfort as the default would have led to render the Corporate Debtor

ineligible to participate in tender for power supply for which the last date

was 23rd August, 2019. In any case, (it is argued by the Counsel for

Respondent that) the Appellant has now been heard and according to the

Counsel, even now no good reasons are shown as to how and why the

Appellant would not be liable to abide by the COC decision.

7. We have heard Counsel for both sides. Under Section 5(13) of IBC

"Insolvency Resolution Process Costs", inter alia, includes the amount of

any interim finance and costs incurred in raising such finance. Section

5(15) says that "Interim Finance" means any financial debt raised by the

Resolution Professional during the insolvency resolution process period.

Company Appeal (AT) (Ins) No.887 of 2019 10

Section 20 of IBC relates to "Management of operations of Corporate

Debtor as going concern" and it is responsibility of the Interim Resolution

Professional (and later the Resolution Professional) to make every

endeavour to protect and preserve the value of the property of the corporate

debtor and manage the operations of the corporate debtor as a going

concern. The Sub-Section (2) of Section 20 gives authority to the IRP under

Clause 'c' to raise interim finance provided that no security interest shall

be created over any encumbered property of the Corporate Debtor without

prior consent of the creditors whose debt is secured over such encumbered

property. Clause (e) of Sub-Section (2) of Section 20 states that the IRP has

the authority "to take all such actions as are necessary to keep the

Corporate Debtor as a going concern". Section 25 of IBC which deals with

"Duties of Resolution Professional" in Sub-Section (2)(c) provides that the

Resolution Professional shall undertake to "raise interim finances subject

to approval of the Committee of Creditors under Section 28." (Section 28(3)

requires approval of vote of 66% of the voting shares.) Relevant part of

Section 28(1) reads as follows:-

28. "(1) Notwithstanding anything contained in any other law for the time being in force, the resolution professional, during the corporate insolvency resolution process, shall not take any of the following actions without the prior approval of the committee of creditors namely:--

(a) raise any interim finance in excess of the amount as may be decided by the committee of creditors in their meeting;"

Company Appeal (AT) (Ins) No.887 of 2019 11

Thus IRP/RP and COC have responsibilities with regard to interim

finance.

8. If a Resolution Plan comes to be considered and approved, Section

30(2)(a) shows that such Plan would require providing for the payment of

the Insolvency Resolution Process costs in a manner specified by the Board

"in priority" to the payment of other debts of the Corporate Debtor. Even if

no Resolution Plan comes around to get approved and contingencies as

provided in Section 33(1) arise and order of liquidation is to be passed,

even then Section 53(1) makes it clear that in the waterfall mechanism,

the first in order of priority is "the insolvency resolution process costs" and

the liquidation costs paid in full.

9. Keeping in view all these provisions, it is surprising that the

Appellant should be apprehensive regarding Letter of Comfort sought for

by the Committee of Creditors.

10. The learned Counsel for the Appellant relied on the Judgement in

the matter of "ICICI Bank Ltd. Versus Sidco Leathers Ltd. and others"

- (2006) 10 SCC 452 and referred to para - 41 of that Judgement to submit

that while enacting a statute, Parliament cannot be presumed to have

taken away a right in property, and that right to property is a constitutional

right. The Counsel then relied on para - 43 of the judgement which reads

as follows:-

"43. If Parliament while amending the provisions of the Companies Act intended to take away such a valuable right of the first charge-holder,

Company Appeal (AT) (Ins) No.887 of 2019 12

we see no reason why it could not have stated so explicitly. Deprivation of legal right existing in favour of a person cannot be presumed in construing the statute. It is in fact the other way round and thus, a contrary presumption shall have to be raised."

If that Judgement in the matter of ICICI is perused, it appears to be

in the context of winding up proceedings under the old Companies Act,

1956 and in the context of Section 529-A which dealt with overriding

preferential payment in the winding up of a Company to workmen's dues

and debts due to the secured creditors to the extent such debts ranked

under Section 529(1)(c) pari passu with such dues. Hon'ble Supreme Court

noted (in para - 38) that Section 529-A did not ex facie contain a position

(on the aspect of priority) amongst the secured creditors. Provisions of

Transfer of Property Act and terms of Contract were considered and the

observations as above were made. Relying on the above Judgement of the

Hon'ble Supreme Court, the learned Counsel for the Appellant is

submitting that the Appellant cannot be forced to contribute or incur

further liability under CIRP as it would amount to forcing the Appellant to

contribute. We are not convinced that the Judgement helps the Appellant

in the facts and law applicable in present matter. When COC in a meeting

of the Financial Creditors by requisite majority takes a decision with regard

to CIRP costs which includes execution of responsibility put by law on the

IRP/RP to keep the Company a going concern, the same cannot be treated

as forcing the Appellant to part with property or forcing to incur liability.

Appellant has itself sought to be part of COC and joined it. Nobody is

Company Appeal (AT) (Ins) No.887 of 2019 13

forcing Appellant to file claim and/or to be part of COC. If the Appellant is

part of COC and wants to remain part of COC, the Appellant cannot expect

to only claim benefits from the process and claim that it would not take

any of the liabilities and responsibilities which in the present matter, are

apparently based on legal provisions for the duties to be performed by

IRP/RP/COC. In COC meeting the Appellant has right of dissent but if

decision is still taken by majority provided under the statute, all of COC

members are duty bound to abide by the decision.

11. The argument of the RP shows that the Corporate Debtor is engaged

in the business of generation and sale of electricity from its 58MW Gas

based Combined Cycle Power Plant situated in Tamil Nadu. The Corporate

Debtor had a turnover of Rs.200 Crores approximately in Financial Year

2018 - 2019 and was generating cash surplus of Rs.5 Crores every month.

RP has argued that the Corporate Debtor was regularly paying the salaries

and meeting other expenses from the revenue generated. The RP referred

to the Power Purchase Agreement with consumers pursuant to which

Corporate Debtor had been supplying electricity to the consumers and that

to generate electricity, the Corporate Debtor requires gas. According to the

RP, this was being procured mainly from ONGC and balance quantity was

being procured from GAIL (India) Ltd. in terms of respective Gas Supply

Agreements. On 30th April, 2019, the Gas Supply Agreement executed

between Corporate Debtor and ONGC completed its entire term but on

mutual understanding, ONGC continued to supply gas to the Corporate

Debtor until 10th May, 2019. However, due to ongoing disputes between

Company Appeal (AT) (Ins) No.887 of 2019 14

Corporate Debtor and ONGC with respect to applicability of GDU charges,

ONGC stopped supply of gas on 10th May, 2019.

This, inter alia, explains as to why the RP moved the COC for

necessary support to keep the Company a going concern. If the Corporate

Debtor has been a going concern generating cash surplus of Rs.5 Crores

every month, it would be unwise to let it come to a grinding halt and to

render it no more a going concern, which would be harmful to the object

of maximisation of value. Value of a going concern is much more than a

non-functional plant or concern. The adamant stand of the Appellant in

the facts of the matter and keeping in view legal provisions, cannot be

appreciated.

12. The learned counsel for the Appellant has argued that the Appellant

has 25% voting share in the COC and it is unsecured Financial Creditor.

It is stated that the Appellant dissented in the meeting and it is commercial

wisdom of the Appellant that Corporate Debtor being highly leveraged, it

would provide negligible value maximisation and loading of any additional

debt on the Corporate Debtor could be detrimental to the value of its

assets. The learned Senior Counsel referred to para - 39 of the Judgement

in the matter of "K. Sashidhar v. Indian Overseas Bank and Others" -

2019 SCC OnLine SC 257 to state that the commercial wisdom of the

individual Financial Creditor is non-justiciable. It would be appropriate to

reproduce the portion from Judgement of the Hon'ble Supreme Court from

para - 39 which reads as under:-

Company Appeal (AT) (Ins) No.887 of 2019 15

"There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject matter expressed by them after due deliberations in the CoC meetings through voting, as per voting shares, is a collective business decision. The legislature, consciously, has not provided any ground to challenge the "commercial wisdom" of the individual financial creditors or their collective decision before the adjudicating authority. That is made nonjusticiable."

Going through the observations of the Hon'ble Supreme Court and

considering present facts what appears to us is that in the meeting of COC,

the Appellant may have taken a decision to dissent and that dissent even

if treated as a commercial wisdom of the dissenting Financial Creditor,

cannot be questioned before Adjudicating Authority so as to see whether

or not the same was justified. Commercial wisdom of individual Financial

Creditor may not be justiciable. Same is the case with collective decision.

However, under the law, if individual creditor's decision has not been

accepted by COC in its collective decision, what is enforceable is only the

collective decision. When the law provides that a decision taken by majority

would be binding, the dissenting Financial Creditor, even with the dissent,

would remain bound by the majority decision taken as per the requisite

voting share.

The Impugned Order shows the reasons why without waiting for

Appellant the Order was required to be passed. It was in interest of

Company Appeal (AT) (Ins) No.887 of 2019 16

resolution of Corporate Debtor. Even now, Appellant has not made out

good case that if it was heard, Impugned Order could have been different.

We find principles of natural justice are satisfied. We are not convinced

with the argument that amended Sub-Section (4) of Section 30 requires

only Secured Financial Creditors to contribute towards interim finance and

not the Unsecured Financial Creditors. No such interpretation can be

drawn. We will not interfere in the collective decision of COC in this regard.

13. The dissenting Financial Creditor in COC cannot be allowed to

scuttle CIRP process otherwise the provision permitting COC to take

decisions with regard to subjects stated in Section 28(1) by given majority

of 66% under Section 28(3) would be rendered nugatory.

14. For reasons mentioned above, we do not find any substance in this

Appeal. The Appeal is dismissed. No Orders as to costs.

[Justice A.I.S. Cheema] Member (Judicial)

[Kanthi Narahari] Member (Technical)

[V.P. Singh] Member (Technical) /rs/md

Company Appeal (AT) (Ins) No.887 of 2019