Swwapnil Bhingardevay vs Khandoba Prasanna Sakhar Karkhana Ltd. ...

[Arising out of Order dated 1st August, 2019 passed by National Company Law Tribunal, Mumbai Bench in CP No.1368/IBC/MB/MEH/2017]

IN THE MATTER OF: Before NCLT Before NCLAT Shri Swwapnil Bhingardevay .... Appellant 52/788, Lokmanya Nagar, Near Jogging Park, Pune, Maharashtra -411030

Vs.

1. M/s. Khandoba Prasanna Corporate Debtor/ Respondent No.1 Sakharkar Khana Limited RP Through Resolution Professional 52/788, Lokmanya Nagar, Near Jogging Park, Pune, Maharashtra -411030

2. M/s Sai Agro (India) SRA Respondent No.2 Chemicals Through partners Ghat No.892, Near Ingavale Mala Alate, Hatkanangale, Kolhapur, Maharashtra -416109

3. Ms/ Sarvadnya Industries .... Respondent No.3 Pvt. Ltd. 65, Balupatlachi Wadi, Taluka Khandala, Satara - 415521 2

4. M/s XL Energy Limited .... Respondent No.4 (Formerly XL Telecom and Energy Ltd.) H.No. 19-161111 D-4, Laxmipuram Colony Near ECIL, Hyderabad

5. Mr. Jitendra Palande Resolution Professional Respondent No.5 (RP) 38, 5-3 D, New Ajanta Avenue, Paud Road, Kotharud, Pune - 411038

For Appellant: Shri Krishnendu Dutta, Sr. Advocate with Shri Murari Kumar, Shri Achint Kumar and Shri Rahul Gupta, Advocates

For Respondents: Shri Swapan Pradhan, Advocate with CS Ritesh Mahajan (R-2) Shri Ajay K. Jain, Shri Yash Karan Jain and Shri Atanu Mukherjee, Advocates (R-3) Shri Shikhil Suri, Ms. Nikita Thapar, Shri Prashant S. Kenjale, Ms. Shilpa Saini and Shri Jitendra Palande, Advocates (R-5)

JUDGEMENT

(2nd June, 2020) A.I.S. Cheema, J. :

1. This Appeal has been filed by promoter and Director of the

Corporate Debtor who claims that the Corporate Debtor is MSME and the

Appeal has been filed against Impugned Order dated 1st August, 2019

passed by the National Company Law Tribunal, Mumbai Bench (NCLT -

Adjudicating Authority). By the said Order, the Adjudicating Authority

has approved Resolution Plan of M/s. Sai Agro (India) Chemicals

(Respondent No.2 - SRA [Successful Resolution Applicant]). This Appeal

Company Appeal (AT) (Ins) No.943 of 2019 3

on 12.09.2019 was admitted to limited extent of examining viability and

feasibility of the "Plan".

2. The Application - CP No.1368/IBC/MB/MEH/2017 under Section

7 of Insolvency and Bankruptcy Code, 2016 (IBC - in short) was filed

initially by Financial Creditor - The Karad Urban Co-operative Bank Ltd.

against the Respondent No.1 (Corporate Debtor - Company). The

Application came to be admitted and the Company went through the

Corporate Insolvency Resolution Process (CIRP) which has culminated

into the Resolution Plan of Respondent No.2 being accepted.

3. The Corporate Debtor has authorized capital of Rs.14 Crores and

paid up capital of Rs.9.82 Crores. It had taken licence for production of

ethanol from rectified spirit. The loan taken from the Financial Creditors

became NPA and the Application under Section 7 came to be filed.

4. Appellant claims that in the second meeting of COC (Committee of

Creditors) dated 27th March, 2018, two Valuers came to be appointed to

work out fair value and liquidation value. The Resolution Professional on

30th March, 2018 instead of publishing invitation for Resolution Plan,

issued Public Notice for outright sale of Corporate Debtor as a going

concern. The Appellant had also tried to submit his Resolution Plan in

the course of CIRP. The Ethanol Plant installed in the premises of

Corporate Debtor is owned by Respondent No.3 - M/s. Sarvadnya

Industries Pvt. Ltd. COC was aware of this as on 12th October, 2018 in

4th meeting, Appellant was not allowed to restart the ethanol plant on the

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pretext that it is owned by third party who is searching buyer for the

plant. On 12th January, 2019, COC shortlisted prospective Resolution

Plans. The Resolution Plan of Respondent No.2 - SRA was received on 9th

February, 2019 and that the Resolution Professional without examining

the same, had taken up with COC which was approved on the same date

of 9th February, 2019 in the 8th COC meeting and the Plan suffers from

feasibility and viability. The Respondent No.5 (RP) committed various

irregularities which are material irregularities and hence the Plan should

not have been accepted.

5. The Appellant claims that there was no publication inviting

Expression of Interest (EOI - in short). The Resolution Plan was not

examined by the RP as required under Section 30(2) of IBC and the COC

hurriedly accepted the Resolution Plan which was the only Resolution

Plan received. The non application of mind is apparent from the admitted

fact that the Resolution Plan has not noticed that the ethanol plant and

machinery does not belong to the Corporate Debtor. The Resolution Plan

has made business proposals and proceeds on the assumption that the

plant is of the Corporate Debtor. The Corporate Debtor cannot function

without the ethanol plant machinery which the Respondent No.3 wants

to take back and already has an Order of this Tribunal in its favour

passed in Company Appeal (AT) (Ins) No.897 of 2019 passed on 16th

December, 2019. Thus, the Appellant claims that the Plan as has been

approved is not feasible and viable and the CIRP also suffered from

Company Appeal (AT) (Ins) No.943 of 2019 5

material irregularities. It is argued that the liquidation value of the

Corporate Debtor was already known to the Respondent No.2 - SRA and

under Section 36(2), it is material irregularity. For such reasons, the

Appellant wants the Resolution Plan approved to be set aside.

6. The Respondent No.2 - SRA has argued that the Resolution Plan

was prepared on the basis of Information Memorandum provided by

Resolution Professional to the Resolution Applicant and that the

Information Memorandum nowhere mentioned about the ethanol plant

and machinery. It is stated that the Janata Sahakari Bank Limited has

taken possession of the Plant and is in the process of conducting sale of

the plant by way of auction. The SRA claims that the RP had sent an

email on 7th February, 2019 to SRA about inclusion of liquidation value

in the Resolution Plan and SRA had claimed that it was on the basis of

independent valuation.

7. The Respondent No.3 has submitted that the Resolution Plan is

based upon takeover of the Corporate Debtor and it continuing as going

concern in its normal course of business. The entire business plan

attached is based upon operation of the ethanol plant. Respondent No.3

refers to the Order of this Tribunal in Appeal No.897 of 2019 that the

Respondent No.3 can take over the possession of the ethanol plant

machinery. This Respondent claims that it has settled with its Banker -

Janata Sahakari Bank Limited and is taking over the ethanol plant and

machinery. Respondent No.3 claims that in the absence of the ethanol

Company Appeal (AT) (Ins) No.943 of 2019 6

plant, the Plan approved by the Adjudicating Authority becomes

unworkable/non-executable. It is argued that it is necessary for

Adjudicating Authority to be satisfied that the plan has provision for

effective implementation. It is added by this Respondent that the SRA has

not complied with terms of payment as envisaged in the approved Plan

and already MA 3943 of 2019 has been filed by the workers/employees

for non-payment of their dues under the Plan and Section 33(4) of IBC

has been attracted. It is argued by Respondent No.3 that on 09.02.2019

within a span of two and half hours, the exercise of examining and

acceptance of the Resolution Plan under Section 30(2) and 30(4) of IBC

was carried out by RP and COC. Thus, feasibility was not there, was not

noticed.

8. The Respondent No.5 - Resolution Professional has argued to

defend the CIRP conducted. According to him, the COC has approved the

Resolution Plan and there can be no interference in the commercial

wisdom of COC as held in the matters of "Committee of Creditors of

Essar Steel India Limited Vs. Satish Kumar Gupta & Ors." (2019 SCC

OnLine SC 1478) and "K. Sashidhar v. Indian Overseas Bank and

Ors." (2019 SCC Online SC 257). The RP claims that there was

compliance of Section 30(2) of IBC. There is nothing in the Code

specifying as to how much time RP should take to examine the

Resolution Plan and how much time COC should take. It is claimed that

there was no format of expression of interest under Regulation 36A of

Company Appeal (AT) (Ins) No.943 of 2019 7

Insolvency and Bankruptcy Board of India (Insolvency Resolution Process

for Corporate Persons) Regulations, 2016 (Regulations - in short). RP

claims that Form - G at the relevant time was Form of invitation of

Resolution Plans but that the practice was to publish COC approved

invitation of expression of interest. RP has photocopied a g-mail in the

written submissions (Diary No.19095) (after the oral arguments were over

and without supportive Affidavit), and RP has added the photocopy to

claim that the SRA had on 7th February, 2019 responded to the RP

regarding liquidation value mentioned in Plan that it was based on its

own sources. RP claims that the fact that the liquidation value as

calculated by RP after taking Report of two Valuers which is Rs.13.53

Crores which has been mentioned by the SRA, is mere coincidence. The

RP is thus defending the process.

9. We have heard Counsel for both sides and gone through the record.

10. Under Section 61(3)(ii) of IBC, in Appeal against approval of

Resolution Plan, one of the grounds for this Appellate Tribunal to see is,

if there has been material irregularity in the exercise of powers by the

Resolution Professional during the Corporate Insolvency Resolution

period. In this regard, Regulation 36(2) of IBC (which is also part of the

law required to be followed) provides as to the information which should

be there in the Information Memorandum. Initially Regulation 30(2)(j)

required the RP to mention the liquidation value. But this Clause (j) was

subsequently omitted with effect from 31st December, 2017. Clearly, such

Company Appeal (AT) (Ins) No.943 of 2019 8

information could not be mentioned to the prospective Resolution

Applicants. Regulation 35(2) attracts requirement of maintaining

confidentiality with regard to the "fair value" and the "liquidation value"

of the Corporate Debtor and the Regulation 35(2) controls the manner in

which such information can be shared. In the present matter, there is no

dispute that the Respondent No.2 - SRA exactly mentioned the

liquidation value in the Resolution Plan (now approved and in dispute)

which has a date of 7th February, 2019 and which Resolution Plan was

accepted by COC on 9th February, 2019. According to the record, COC

appointed two Valuers on 27th March, 2018 for getting the liquidation

value and fair value. As per procedure, when such value is received, the

average of both is taken as "fair value" or "liquidation value" (as the case

may be). Form 'H' (Page - 394) mentions liquidation value as Rs.13.53

Crores. Resolution Plan - Annexure A-34 (Page 314 @ Page 332) shows

SRA calculating Payment Terms with liquidation value exactly as

Rs.13.53 Crores. Apparently SRA knew it. We find it difficult to digest

the argument of the Resolution Professional that the exact liquidation

value stated by the SRA is mere coincidence. We reject the argument of

SRA that it got its own valuation done. No material is shown in this

regard. As regards the photocopy of email copied in the written

submission by RP, it is not supported by Affidavit. Apart from that, we

have doubts with regard to the manner in which the Plan was processed

and put up. The Resolution Plan (Annexure A-34 on 1st Page, Page 314)

has printed date of 7th February, 2019. The self-declaration of the

Company Appeal (AT) (Ins) No.943 of 2019 9

Resolution Applicants who are the two partners of Respondent No.2 at

Page - 342 shows the date as 9th February, 2019. This self-declaration is

part of the Resolution Plan itself with running Page No.29. Thus although

the Resolution Plan claims to be dated 7th February, 2019 (and e-mail is

claimed of 07.02.2019 regarding liquidation value), no material is put up

by the Resolution Professional regarding the date on which Plan was

received. It appears to us that this Resolution Plan was complete only on

9th February, 2019 which is the date of the 8th meeting of COC. The

Appellant and Respondent No.3 are claiming that the Plan was received

on 9th February, 2019 itself and directly placed before COC. On earlier

date of 30.01.2019, SRA was still only a prospective Applicant (See

Annexure A-30 Page 217). The RP has not put up material to show that

the RP had examined the Plan as required under Section 30(2) of the IBC.

There is substance in the claim of the Appellant and Respondent No.3

that the Plan was received on 9th February, 2019 and the same being the

only Plan, was rushed through the COC meeting and in two - three

hours, it was approved without duly examining the Resolution Plan by

the Resolution Professional and without the COC being satisfied as

required under Section 30(4) of IBC that the Plan is feasible and viable.

11. There is no dispute now, that the Resolution Plan does not in any

manner consider as to what happens if the ethanol plant machinery,

which belongs to Respondent No.3, is taken away by the Respondent

No.3 who is the real owner and had given the plant machinery to the

Company Appeal (AT) (Ins) No.943 of 2019 10

Corporate Debtor on heavy rent. The Plan proceeds on the basis as if the

ethanol plant and machinery belongs to the Corporate Debtor. The

Appellant is pointing out that business plans are contemplated in the

Resolution Plan on the basis that once approved, the SRA will continue

the business. We are not interfering with the commercial wisdom of the

COC but what appears to us from the record is that the COC did not

consider feasibility and viability of the Resolution Plan in case the plant

and machinery are taken away by the Respondent No.3. The Respondent

No.3 is still insisting on taking away the plant and machinery and there

is already judicial Order in view of Respondent No.3 in this regard. It has

been referred above. Apparently the Corporate Debtor cannot function

without the Ethanol plant machinery.

12. Thus, we find that there was compromise of confidentiality

regarding liquidation value which appears to have been known to the

Respondent No.2 before submitting the Resolution Plan. Apart from this

the plant and machinery were not owned by the Corporate Debtor, and

the Resolution Plan submitted on the hypothesis that the plant and

machinery would be available for business and explanation is clearly a

Plan which is not feasible and viable. The 8th meeting of COC started at

11 A.M. and the Plan had been approved by 2.00 P.M. and there is

absence of material of compliance of Section 30(2) of IBC and in the facts

of the matter, there is serious doubt of the RP examining it before putting

up the same before COC. On the face of record, COC has not considered

Company Appeal (AT) (Ins) No.943 of 2019 11

the feasibility and viability while accepting Resolution Plan having

fundamental defect with regard to the backbone itself of factory - i.e. -

the Ethanol Plant Machinery.

13. Apart from the material irregularity of failure of maintaining

confidentiality regarding confidentiality of liquidation value, there is

another irregularity in the CIRP. This is with regard to non-publication of

Notice inviting expression of interest. Regulation 36A as applicable at the

concerned time, required issuing an invitation to the prospective

Resolution Applicants to submit Resolution Plan. The RP has admitted

(Diary No. 19094) that the Form - G at the relevant time was in the form

of "Invitation of Resolution Plan" but if the present record is seen, it can

be found that in the second meeting of COC (Annexure A-17 Page - 212

at 213), the COC approved draft of newspaper advertisement for inviting

expression of interest from prospective bidders aimed at achieving

resolution. We do not know if the publication actually done on 30 th

March, 2018 (Annexure A-18 Page - 215) is the same. The reason is that

Annexure A-18 although it has title of "Invitation of Expression of

Interest", is actually a Notice which is inviting proposals for "outright

sale" of the Company on a going concern basis. Even if COC approved

such a draft, that does not mean that the provisions under the

Regulations and Form - G under Regulation 36A were complied with. The

Notice published in the newspaper is clearly a Notice inviting proposals

for outright sale of the Company as a going concern. The RP cannot

Company Appeal (AT) (Ins) No.943 of 2019 12

escape by saying that there was practice at the relevant time to publish

COC approved invitation of EOI claiming that there was no prescribed

format. His written submissions further add that Form - G at the relevant

time was a Form for "Invitation of Resolution Plans". By issuing the

Notice for outright sale, instead of inviting expression of interest for

resolution plan of the Corporate Debtor, there was clearly irregularity in

the conducing of the CIRP. The irregularity does not get cured only

because Adjudicating Authority passed Orders on 09.04.2018 (Annexure

A-19 Page - 216) holding that the Public Notice will be limited for the

purpose of inviting Resolution Applicants and not for outright sale. The

defect cannot be cured as the genuine Resolution Applicants could not

apply and must be said to have been diverted and put to disadvantage of

themselves and the Corporate Debtor.

14. For the above reasons, we find that the CIRP suffered from material

irregularities and the Resolution Plan approved suffers from feasibility

and viability. For such reasons, the Resolution Plan as approved deserves

to be set aside.

We pass the following Order:-

ORDER

The Appeal is allowed. For the above reasons,

we set aside the Impugned Order and remit the matter

back to the Adjudicating Authority with a direction to

send back the Resolution Plan to the Committee of

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Creditors to resubmit the Plan taking into

consideration observations made above and after

satisfying the parameters as laid down by the Hon'ble

Supreme Court in the Judgement in the matter of

"Essar Steel" referred (supra) and IBC. The

Adjudicating Authority may give specific time period to

the Resolution Professional to place matter before

Committee of Creditors for resubmitting the Resolution

Plan taking into consideration observations made

above and after satisfying the parameters laid down by

the Hon'ble Supreme Court and IBC. Further

incidental Orders may also be passed.

On resubmission of the Resolution Plan, the

Adjudicating Authority will deal with the same in

accordance with law.

The Appeal is disposed accordingly. No costs.

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

(Justice A.B. Singh) Member (Judicial)

[Kanthi Narahari] Member (Technical) rs

Company Appeal (AT) (Ins) No.943 of 2019