Union Bank Of India Erstwhile ... vs Mr. Dinkar T. Venkatasubramanian

S. CONTENTS PARA PAGES NO.

1. Factual Background 3 3

2 Appellants Submission 7 4

3 Respondent no.1 Submission (RP) 8 8

4 Rejoinder of Appellant against the reply of RP 9 21

5 Analysis 10 29

6 Findings 10.20 41

7 Order 45

Company Appeal (AT) (Insolvency) No. 729 of 2020 NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI

Company Appeal (AT) (Insolvency) No. 729 of 2020

[Arising out of Impugned Order dated 09 July, 2020, passed by the Adjudicating Authority/National Company Law Tribunal, Chandigarh Bench, Chandigarh in IA No. 222/2020 in Company Petition (IB) No.42/Chd./Hry./2017 (admitted)]

IN THE MATTER OF: Union Bank of India (Erstwhile Corporation Bank) Stressed Assets Management Vertical Overseas Branch M - 93, Connaught Place New Delhi - 110001 Appellant

Versus

1. Mr Dinkar T. Venkatasubramanian Resolution Professional of Amtek Auto Limited EY Restructuring LLP Golf View Corporate Tower B Sector - 42, Gurugram, Haryana Respondent No.1

2. DVI PE (Mauritius) Ltd A company under the laws of the Republic of Mauritius Having its Registered Office at: IQ EQ Fund Services (Mauritius) Limited 33 Edith Cavell Street Port Louis 11324 Through his Counsel Mr Himanshu Gupta Advocate 215 C, Sector 4, MDC, Panchkula Respondent No.2

3. Deccan Value Investors L P A Limited Liability Partnership Incorporated in Delaware USA Having its registered office at: 850, New Burton Road Suite 201, Dover Delaware 19904, USA Through his Counsel Mr Himanshu Gupta Advocate 215 C, Sector 4, MDC, Panchkula Respondent No.3

Company Appeal (AT) (Insolvency) No. 729 of 2020 1 of 46 Present: For Appellant : Mr Gopal Jain, Sr Advocate with Mr Alok Kumar, Mr Manan Gambhir, Mr Nikhil Malhotra and Ms Garima Soni, Advocates.

For Respondent : Mr Sanjay Bhatt, Mr Karan Kohli and Ms Niharika Sharma, Advocates for R1. Mr Chanakya Keswani and Mr Dinesh Pednekar, Advocates for R2 & 3.

Glossary

IRP Interim Resolution Professional NCLT National Company Law Tribunal NCLAT National Company Law Appellate Tribunal I&B Code/ Code Insolvency and Bankruptcy Code CIRP Corporate Insolvency Resolution Process ICD Insolvency Commencement Date CoC Committee of Creditors LC Letter of Credit LHG Liberty Housing Group CD Corporate Debtor

CORAM: Hon'ble Mr Justice M. Venugopal, Member (J) Hon'ble Mr V. P. Singh, Member (T) Hon'ble Dr Alok Srivastava, Member (T)

(Virtual Mode)

[Per; V. P. Singh, Member (T)]

1. The present Appeal emanates from the Order of the Adjudicating

Authority/National Company Law Tribunal, Chandigarh Bench, Chandigarh

dated 09 July 2020, passed in IA No. 222/2020 filed U/S 60(5) of the

Insolvency and Bankruptcy Code, 2016 (in short 'I&B Code') in Company

Petition (IB) No.42/Chd./Hry./2017.

Company Appeal (AT) (Insolvency) No. 729 of 2020 2 of 46

2. The Parties are represented by their original status in the Company

Petition for the sake of convenience.

Factual Background

3. The Appellant (Union Bank of India) Financial Creditor applied for

initiation of Corporate Insolvency Resolution Process under Section 7 of the

Insolvency and Bankruptcy Code, 2016 against Corporate Debtor (Amtek

Auto Limited). The Adjudicating Authority admitted the petition and

appointed Shri Dinkar T. Venkatasubramanian as the Interim Resolution

Professional (IRP).

4. Corporation bank, a Financial Creditor of the Corporate Debtor, now

known as Union Bank of India, filed an Application, IA No 222/2020, seeking

direction for modification of the Approved Resolution Plan of Respondent No.

2 and 3, in compliance with Regulations 42 and 44 of the liquidation Process

Regulation 2016 for not deducting ₹ 34 crores from the final payment to be

made to the Applicant/Appellant as per the scheme of distribution from out

of the amount under the Resolution Plan was rejected. Therefore, feeling

aggrieved by the said Order, the present Appeal is filed.

5. Respondent No. 1 is the Resolution Professional of the CD1, and

Respondents 2 & 3 are jointly the Successful Resolution Applicants.

6. Corporation Bank, a Financial Creditor of the Corporate Debtor, now

known as Union Bank of India, filed the instant IA 222 of 2020 on 12 March

2020 against the Resolution Professional of the Corporate Debtor (Respondent

1 corporate debtor Company Appeal (AT) (Insolvency) No. 729 of 2020 3 of 46 No. 1) and Successful Resolution Applicant 2, (Respondent No. 2 & 3), under

Section 60 (5) (c) of the I&B Code read with Rule 11 of the NCLT Rules seeking

the following directions/reliefs:

a. Allow the instant Application filed by the Applicant and direct the IRP to get the Resolution Plan modified so as to comply with Regulation 42 and 44 of the Liquidation Process Regulation 2016;

b. direct the Respondent Resolution Professional to not to deduct the amount of ₹ 34 crores from the final payment to be made to Applicant as per the scheme of distribution of amount under Resolution Plan; and

c. direct the Respondent Resolution Professional to further include amount of ₹ 6,22,58,072.64 towards LC payments and ₹ 61,39,000 towards Bank Guarantee (BG) payments and the total admitted claim of the Applicant.

7. Appellants Submission

7.1 The Appellant contends that Respondent No.1 erroneously denied the

Appellant's a claim of ₹ 39,61,54,488 towards Non-Fund Based Facility3

despite actively operating the bank accounts of the Corporate Debtor and

being well aware of all the financial transactions, including the fact that the

NFB Facility falls well within the definition of financial debt under Section

5(8)(h) of the IBC. The fact that Respondent No.1 was operating the bank

account of Corporate Debtor can be seen from the documents, Annexure 4-5

at Pg. 111 of the Appeal Paper book.

2 SRA 3 NFB

Company Appeal (AT) (Insolvency) No. 729 of 2020 4 of 46 7.2 The Appellant is one of the dissenting Secured Financial Creditors

allotted the 'Liquidation value as per the allocation sheet and, therefore,

approved by the CoC. The claim of Rs. 39.61 crores were erroneously rejected

by the IRP only because the same was not crystallised.

7.3 Respondent No.1 /RP had been regularly giving instructions regarding

debiting a cash credit account as and when any LC/BG4 is presented before

the Appellant for payment and in case of issuance of any fresh LC/BG (NFB

Facility). This admitted arrangement between the Appellant and Respondent

No.1 is reflected in the letter dated 08.08.2017, annexed as Annexure A-5 at

Pg. 111 of the Appeal Paper book.

7.4 In any event, all the payments were made directly to the

supplier/vendor /beneficiary of the NFB Facility by debiting the cash credit

account of the Corporate Debtor. No amount has been credited towards the

loan account of the Corporate Debtor. It is reiterated that the payments were

made directly to the vendors, and no amount was appropriated or adjusted

by the Appellant towards any outstanding claim under CIRP. Therefore, the

Appellant has not done unjust enrichment by alleged recovery of ₹ 33.34

crores from the Corporate Debtor during the CIRP.

7.5 It is also clearly admitted by Respondent No.1 that the NFB Facility has

been issued in favour of the beneficiary/vendors for the purchase of various

types of steels and other alloys. However, despite this admitted fact,

Respondent No.1 failed to appreciate that the Corporate Debtor is liable to

4 Letter of Credit Bank Guarantee

Company Appeal (AT) (Insolvency) No. 729 of 2020 5 of 46 pay the suppliers/beneficiaries during the CIRP period. The Appellant did the

same by debiting the cash credit account of the Corporate Debtor as

instructed by Respondent No. 1. Therefore, the payments consequently made

to such beneficiaries by debiting the Corporate Debtor's account are

misconceived as recovery towards the dues.

7.6 It is further submitted that since 'LHG'5 failed to fulfil the condition in

the Resolution Plan to provide a cover for equivalent amount from a scheduled

bank in the event, it intends to avail the NFB Facility, the Appellant

specifically mentioned in its letter dated 24.10.2018 that any provision

concerning the NFB Facility will be subject to the fulfilment of the condition

mentioned in the Resolution Plan. The letter dated 24.10.2018 is annexed as

Annexure 4-6 at Pg. 149 of the Appeal Paper book.

7.7 On perusal of the letter dated 30.10.2018 sent by Respondent No. 1 to

the Appellant, it is clear that Respondent No.1 was aware that the NFB Facility

limits were subject to covering the limit by another scheduled commercial

bank. This is in line with the discussions with LHG6 and is also mentioned in

the Resolution Plan. The letter dated 30.10.2018 is marked in the Reply filed

by Respondent No.1 at pg. 45.

7.8 The Appellant references the letter dated 30.10.2018, i.e. Email dated

21.11.2018 sent by Corporate Debtor regarding the Continuance of NFB

Facility of Rs. 43 Crores (NFB Limits) in the capacity of the person-in-charge

5 Liberty House Group 6 Liberty House Group

Company Appeal (AT) (Insolvency) No. 729 of 2020 6 of 46 for the management of the Corporate Debtor, and Respondent No. 1 addressed

himself as the Insolvency Professional in the said Email. The said Email is

annexed in the Reply filed by Respondent No.1, Resolution Professional,

Annexure R, at Pg.49.

7.9 Further, Respondent No.1, in its Reply, has mentioned that there was

no reservation shown or recorded in the CoC minutes on behalf of the

Appellant. Therefore, the CoC meeting dated 07.02.2020 records the

objections raised by the Appellant at para (n) of the CoC meeting. On the

contrary, Respondent No. 1 misrepresented the CoC by giving it a colour of

recovery of LCs made by Appellant from the Corporate Debtor during CIRP.

Based on the incorrect information about the interim finance, the claim of ₹

34 Crores towards LC7 got rejected, despite that the amount was directly paid

to the vendors of the Corporate Debtor from the current account under the

specific instructions of Respondent No. 1 to keep the Corporate Debtor a going

concern.

7.10 Further, the Appellant had also objected vide its letter dated 20.02.2020

to the acts of Respondent No. 1 and made it clear that the LCs availed by the

Corporate Debtor is like a contingent liability. Therefore, the amounts were

being paid directly to the vendors/suppliers of the Corporate Debtor by the

Appellant.

7.11 But Respondent No. 1 misled the CoC by not placing all the facts and

records. In particular, his various requests for debiting the current account

7 Letter of Credit

Company Appeal (AT) (Insolvency) No. 729 of 2020 7 of 46 of Corporate Debtor or issuance of fresh NFB Facility. Furthermore,

Respondent No.1 had also misled the CoC by stating that the Appellant had

made a recovery of ₹ 34 Crores when the vendors of the Corporate Debtor

were the ultimate beneficiaries under the NFB Facility. Therefore, the decision

taken by the CoC is based on the incorrect information provided by

Respondent No.1.

7.12 The Adjudicating Authority failed to consider that the Appellant, a

dissenting Financial Creditor, is entitled to liquidation value according to

Section 53 of the IBC. Therefore, it did not comply with Regulations 42 & 44

of the IBC (Liquidation Process) Regulations, 2016.

7.13 The Adjudicating Authority vide its Impugned Order observed that the

Appellant has not objected to the said actions of Respondent No.1 in the CoC

meetings, contrary to the materials placed before the Adjudicating Authority.

Furthermore, the Appellant had refuted the actions of Respondent No. 1 vide

its Email dated 20.02.2020, which the Adjudicating Authority has overlooked.

Therefore, the Adjudicating Authority has misconstrued the payments made

to the beneficiaries/vendors as recovery by the Appellant and dismissed the

IA. No. 222 of 2020 in CP (IB) in CP (IB) No. 42/Chd./Hry./2017 without any

application of mind.

RESPONDENT NO.1. RESOLUTION PROFESSIONAL's SUBMISSION

8. Respondent No.1 submits that the captioned Appeal is not

maintainable, entirely misconceived and devoid of any substance in facts or

law.

Company Appeal (AT) (Insolvency) No. 729 of 2020 8 of 46

a) The Appellant itself filed the Application under Section 7 of the

Insolvency & Bankruptcy Code, 2016 (hereinafter, "IB Code") seeking

initiation of the Corporate Insolvency Resolution Process (hereinafter,

"CIRP") under the IB Code in respect of Amtek Auto Limited (hereinafter,

"Corporate Debtor" and/or "AAL") and Respondent was appointed as

IRP/RP.

b) During CIRP, Respondent made the Public Announcement on

29.07.2017. Pursuant to the Public Announcement, the Appellant filed

its proof of claim under Form C dated 04.08.2017 as on the insolvency

commencement date (hereinafter, "ICD"), for an aggregate amount of ₹

876,42,09,926/-. In the said claim, the Appellant claimed an amount

of ₹ 39,61,54,488/- under the Non-Fund based Letter of Credit Bank

Guarantee facility (from now on, "NFB Facility"). Respondent RP on

verification and collation of the claim filed by the Appellant in terms of

the provisions of the IB Code and the Insolvency and Bankruptcy Board

of India (Insolvency Resolution Process for Corporate Persons)

Regulations 2016 (from now on, the "CIRP Regulations") verified an

amount of ₹ 836,80,55,438/- as 'financial debt' of the Appellant. The

Appellant was included as a member of the Committee of Creditors

(from now on, "CoC") and was assigned voting right of 6.64% in the CoC

based on its financial debt.

c) The Appellant did not challenge the non-verification of the said

uncrystallised amount and thus accepted the same. The Corporate

Debtor did not receive any material during the CIRP on account of these

Company Appeal (AT) (Insolvency) No. 729 of 2020 9 of 46 uncrystallised LCs, and thus the said un-crystallised amount never

became a "financial debt". A copy of the proof of claim dated 04.08.2017

filed by the Appellant is already produced on record by the Appellant

(Annexure A-3 at 91-99 of the captioned Appeal).

d) Respondent RP in terms of the duty cast under Section 20 & 25

of the IB Code to continue and maintain the business of the Corporate

Debtor as a going concern, requested the Appellant to continue and

maintain the NFB Facility limits at the current level as being drawn by

the Corporate Debtor prior to the insolvency commencement date. The

said request was made on account of the business requirement of the

Corporate Debtor. The Corporate Debtor is engaged in manufacturing,

fabrication, and engineering automotive parts. As part of its said

business, it is required to purchase various types of steel and other

alloys. As per the existing market practice, the purchase and

procurement of steel and alloys is always backed by Letters of Credit

Bank Guarantee issued by the purchaser's Bank in favour of the

beneficiary vendor, and thus the continuation of the NFB Facility by the

Appellant was very much needed as a lifeline for the continuation of the

business of the Corporate Debtor as a going concern.

e) That upon the request made by the Answering Respondent/ RP,

the Appellant agreed to continue the NFB Facility at an existing level as

granted to the Corporate Debtor. On the basis of such understanding,

during the CIRP period, the Appellant from time to time issued various

Letters of Credit Bank Guarantee on behalf of the Corporate Debtor

Company Appeal (AT) (Insolvency) No. 729 of 2020 10 of 46 under the said NFB Facility and on devolvement of them used to deduct

the amount from the collection account of the Corporate Debtor

maintained with them acting as the Financial Institution under Section

17(d) of the IB Code and issue fresh Letters of Credit Bank Guarantee

against the available limit of NFB Facility during the CIRP.

f) By the provisions of the IB Code, a resolution plan submitted by

Liberty House Group Pvt. Limited (from now on, "LHG") was put to

electronic voting by the CoC of the Corporate Debtor in the meeting held

on 02.04.2018 and was approved via e-voting concluded on

05.04.2018. In pursuance of it, the Answering Respondent /RP filed an'

Application, being CA No.114 of 2018 under Section 30(6) & 31(1) of the

IB Code for approval of the resolution plan of 'LHG' before the Ld. NCLT

on 16.04.2018. The Ld NCLT approved the LHG Resolution Plan vide

Order dated 25.07.2018. Later on, LHG defaulted in the implementation

of the Resolution Plan.

g) During the implementation of the LHG resolution plan, the

Appellant, in a high handed and unreasonable manner vide letter dated

24.10.2018, asked the Answering Respondent to get the NFB Facility

covered/backed by a comfort letter/ guarantee by a scheduled

commercial bank despite the fact that during that time the Answering

Respondent was only acting as the Insolvency Professional and the

management of the Corporate Debtor was vested with the Monitoring

Committee constituted under the LHG Resolution Plan.

Company Appeal (AT) (Insolvency) No. 729 of 2020 11 of 46

h) The Respondent/RP responded to the said letter sent by the

Appellant vide letter dated 30.10.2018 and requested the Appellant to

continue the NFB Facility without insisting on the condition as

stipulated till the resolution plan of LHG is implemented. It was also

pointed out that withdrawal of the NFB Facility at that stage would hurt

the operations of the Corporate Debtor as a going concern. A copy of

the letter dated 30.10.2018 issued by the Answering Respondent is

already attached in Annexure R-1.

i) The Appellant, without responding to the said request by

misusing its power and position, imposed auto-debit instructions and

started debiting the collection account of the Corporate Debtor

maintained by it as 'Financial Institution for any devolvement of Letter

of Credit/ Bank Guarantee and made recovery of an aggregate amount

of ₹ 33.34 Crores. Monthly details of Letters of Credits (from now on,

"LCs") opened by the Appellant against deductions for LCs made from

the Corporate Debtor during CIRP are already annexed with the reply

of RP.

j) This unexpected act on the Appellant led to extreme hardship for

the Corporate Debtor to keep up its performance due to this unexpected

reduced working capital at hand. More pertinently, the time during

which the Appellant took this action was when the Corporate Debtor

needed the working capital most due to higher than average sales in the

auto sector on account of the festive season. However, the Corporate

Debtor could not take advantage of the same due to the unexpected

Company Appeal (AT) (Insolvency) No. 729 of 2020 12 of 46 action of the Appellant and lack or non-availability of working capital

to procure the raw material on a timely basis. It is also evident from the

dip in revenues of the quarter ending 31.12.2018, amounting to

approximately INR 261 crores instead of the revenue generated in the

quarter ended 31.09.2018.

k) That alarmed by such arbitrary act on the part of the Appellant

and the continuous fall in the performance of the Corporate Debtor, the

Respondent/RP immediately rushed and convened a meeting with the

Managing Director and the General Manager of the Appellant at the

head office of the Appellant at Mangalore on 21.11.2018 and discussed

the situation caused by such arbitrary action on the part of the

Appellant.

l) That after the meeting, it was agreed that (a) out of the total sanctioned

limit of ₹ 43.00 Cr, ₹ 29.08 Cr, which had been utilised as on date, will

be protected and revolved; (b) No auto-debit for payments of the

outstanding LCs as of 21.11.2018 for ₹ 29.08 Cr. until fresh LCs are

opened; and (c) Concerning the un-utilised limit of ₹ 14 Cr, further

discussion will take place.

m) It is pertinent to note that while it was agreed that further

discussion on the unutilised limit of INR 14 crores would be held,

however, the same never materialised, which led to a reduction of -33%

in the LC limit available with the Corporate Debtor for procurement of

raw material thereby further imposing unnecessary pressure on

Company Appeal (AT) (Insolvency) No. 729 of 2020 13 of 46 working capital and thus disrupting operations. The Answering

Respondent conveyed the aforesaid decision to the concerned branch of

the Appellant with a request not to enforce auto-debit instructions from

the collection account maintained with them under Section 17(d) of the

IB Code. The Answering Respondent further followed it up again vide

Email dated 26.11.2018. Vide letters dated 21.11.2018 and

26.11.2018, the Respondent in his capacity of the Resolution

Professional directed the Appellant to not deduct any amount from the

collection account of the Corporate Debtor maintained with it during

the CIRP suo-moto. The extracts of the letter are reproduced below:

"Post the meeting between Resolution Professional and the MD and GM of the Corporation Bank on 21 November 2018, the RP's office had issued the below mail and signed letter regarding the agreements in the afore- mentioned meeting, to the Circle office in Delhi. As discussed, request you to kindly not initiate any debit (Auto/Manual) of the outstanding amount for the utilised limits of LC as on 22 November 2018 and also support us with issuance of fresh LC's, which is of paramount importance for treasury operations at Amtek Auto Limited.

Also, please let us know in case there is any disconnect in understanding regarding the aforesaid subject matter.

Your continued support in this regard is well appreciated." (verbatim copy)

Company Appeal (AT) (Insolvency) No. 729 of 2020 14 of 46

A copy of the Email dated 21.11.2018 and dated 26.11.2018 sent

by the Answering Respondent to the Appellant is already attached

in Annexure R-1, respectively.

n) However, despite having arrived at the understanding with the

highest level with the Appellant, the Appellant, without any further

communication to the Answering Respondent, arbitrarily and in a high

handed manner, withdrew the NFB Facility granted to the Corporate

Debtor while making recovery of a further amount of ₹ 33.34 Crores

from the collection account of the Corporate Debtor maintained with it

during the CIRP by misusing its power as Financial Institution under

Section 17(d) of the IB Code contrary to the instructions of the

Respondent/RP.

o) The Respondent/RP vehemently protested and objected to the

withdrawal of the NFB facility by the Appellant vide letter/ email dated

14.12.2018. On account of the illegal and unauthorised recoveries

being made by the Appellant and to prevent further loss of working

capital, the Answering Respondent was forced to stop the usage of the

collection account with the Appellant and use another account with

Axis Bank Limited for collections starting from December 2018. This

caused an undue burden on the Corporate Debtor during the already

uncertain times to change the collection account with 43 domestic and

international customers. Furthermore, this entire exercise made the

Corporate Debtor susceptible to certain cyber fraud, which was

eventually identified at an early stage, and its after-effects

Company Appeal (AT) (Insolvency) No. 729 of 2020 15 of 46 were nullified because of the Responding Appellant's proactive

intervention and coordination with multiple institutions. A copy of the

letter/email dated 14.12.2018 sent by the Answering Respondent to the

Appellant is already attached in Annexure R-1.

p) The aforesaid arbitrary, illegal and highhanded actions of

recovery of ₹ 33.34 Crores by the Appellant during the continuation of

the moratorium under the IB Code left the Corporate Debtor high and

dry with an almost negligible amount of working capital or cash in hand

to operate as a going concern.

q) Respondent RP further submitted that the tall claims of support

to the Corporate Debtor during the CIRP averred by the Appellant are

very hollow as the result of the illegal action taken by the Appellant is

recovery/unjust enrichment ₹ 33.34 Crores from the Corporate Debtor

during the CIRP contrary to mandate under Section 17(d) of the IB Code

and prohibited under Section 14 of the IB Code.

r) Respondent RP duly brought the action above of illegal recovery

of ₹ 33.34 Crores made by the Appellant from the Corporate Debtor to

the knowledge of the CoC from time to time. To cover up and avoid

any consequences under the IB Code for such an illegal act of

recovery, the Appellant urged the rest of the members of the CoC

to treat the unlawful recoveries made by it as interim finance. On

being asked, the Answering Respondent, in all fairness and

independence as is expected from an Insolvency Professional under

the IB Code, suggested two options to the CoC to either treat the

Company Appeal (AT) (Insolvency) No. 729 of 2020 16 of 46 illegal recovery made by the Appellant as an 'interim finance' under

the IB Code or accent to deduction of the amount of illegal recovery

made by the Appellant out of distribution amount payable to the

Appellant under the resolution plan submitted by the Respondent No.

2 & 3 in the instant Appeal. Accordingly, the CoC (which includes the

Appellant with its voting share of 6.64%) on deliberation consented to

deduction of the said amount from the distribution amount payable to

the Appellant under the resolution plan submitted by Respondent No.

2 & 3 in the 30th and 31st meeting of the CoC held on 05.02.2020 and

07.02.2020, respectively. This treatment led to an increase in the

Appellant's admitted debt and voting share to 7.72%. A perusal of the

minutes above filed by the Appellant (Refer Annexure A-7 at Page 151-

161 of the instant Appeal) itself shows that no reservation of any kind

was shown or recorded in the said minutes on behalf of the Appellant.

s) Respondent further submits that it had no intention to make any

harsh statements against the Appellant but was forced to do so. Despite

having admittedly made a recovery during the moratorium from the

Corporate Debtor, the Appellant still had the audacity to approach the

Ld. NCLT by filing the Application being IA. No. 222 of 2020 seeking

reliefs against the Respondent/RP for not deducting the illegally

recovered amount by the Appellant from the amount to be distributed

to it in terms of the resolution plan submitted by the Respondent No. 2

& 3 for approval by the Ld. NCLT.

Company Appeal (AT) (Insolvency) No. 729 of 2020 17 of 46

t) The Ld. NCLT, after elaborately hearing the Appellant and the

Answering Respondent and while passing the Order dated 09.07.2020,

took note of the fact that the Appellant accented to deduction of the

amounts of ₹ 33.34 Crores and, in fact, nowhere disputed the

distribution of amounts payable to the Appellant being a 'dissenting

creditor' under the terms of the resolution plan of Respondent No. 2 &

3. The relevant part of the Order dated 09.07.2020 reproduced

hereunder:

"7. The decisions of the Committee of Creditors passed with the required majority percentage as per the Code, are Binding On all the stakeholders, including the dissenting members of Committee of Creditors, if any. No member of the Committee of Creditors, after a resolution plan was approved by the Committee of Creditors with the required majority percentage, on one ground or other, cannot challenge the said decisions of the Committee of Creditors. It is for the Adjudicating Authority to apply its judicious mind whether a particular plan submitted for its approval is in compliance of the provisions of the Code and the Regulations made thereunder. The Applicant even in its rejoinder; to the Reply filed by the Resolution Professional, has not denied the fact of deliberations and acceptance of the action of the Resolution Professional for deducting the amount of Rs.34 Crores and for distribution of amount payable to the Applicant under the Resolution Plan of DVI, by the Committee of Creditors, wherein the Applicant is a member.

Company Appeal (AT) (Insolvency) No. 729 of 2020 18 of 46

8. In the circumstances and for the aforesaid reasons, we do not find any merit in the IA and accordingly, the same is dismissed."

u) Respondent RP states that Appellant did not challenge the

decision taken by the CoC in the 30th and 31st meeting of the CoC held

on 05.02.2020 and 07.02.2020 before the Ld. NCLT and confined its

challenge against the Respondent/RP only despite knowing very well

that the decision to make a deduction of ₹ 33.34 Crores from the

proceeds payable to the Appellant under the Resolution Plan of the

Respondent No. 2 & 3 was taken by the CoC and not the

RP/Respondent; the current challenge deserves to be rejected. It is

further surprising that the Appellant has chosen to not even array the

CoC as a party in the instant Appeal. Section 30(4) of the IB Code casts

supervising distribution amongst all creditors, and the resolution

professional has no say in that. Section 30(4) of the IB Code is

reproduced hereunder for the sake of easy reference of this Hon'ble

Appellate Tribunal:

"(4) The Committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the Order of priority amongst creditors as laid down in sub- section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board..."

Emphasis Supplied

Company Appeal (AT) (Insolvency) No. 729 of 2020 19 of 46

v) The Hon'ble Supreme Court in the case of Committee of

Creditors of Essar Steel India Limited Through Authorized

Signatory Vs. Satish K. Gupta & Ors. [(2019) SCC Online SC 1478]

in Para 64 of Judgment and Order has reinforced the said position and

has held as under:

"Thus, what is left to the majority decision of the Committee of Creditors is the "feasibility and viability" of a resolution plan, which obviously takes into account all aspects of the plan, including the manner of distribution of funds among the various classes of creditors. As an example, take the case of a resolution plan which does not provide for payment of electricity dues. It is certainly open to the Committee of Creditors to suggest a modification to the prospective resolution applicant to the effect that such dues ought to be paid in full, so that the carrying on of the business of the corporate debtor does not become impossible for want of a most basic and essential element for the carrying on of such business, namely, electricity. This may, in turn, be accepted by the resolution applicant with a consequent modification as to distribution of funds, payment being provided to a certain type of operational creditor, namely, the electricity distribution company, out of upfront payment offered by the proposed resolution applicant which may also result in a consequent reduction of amounts payable to other financial and operational creditors. What is important is that it is the commercial wisdom of this majority of creditors which is to determine, through negotiation with the prospective resolution applicant, as to how and in what manner the corporate resolution process is to take place."

Company Appeal (AT) (Insolvency) No. 729 of 2020 20 of 46 w) In the present case, the Resolution Plan submitted by the

Respondent Nos. 2 & 3 is silent on the manner of distribution to

dissenting creditors. Even otherwise, it is the CoC and not the

Resolution Professional of the Corporate Debtor who is cast with the

duty to decide and supervise the manner of distribution inter-se

creditors. Therefore, the alleged grievance of the Appellant being a

member of the CoC itself against the Answering Respondent is not only

wholly misconceived but contrary to law. The Hon'ble Supreme Court

in Swiss Ribbons Private Limited Vs. UOI (2019) SCC Online SC 73]

has categorically held that the resolution professional is a facilitator of

the resolution process, whose administrative functions are overseen by

the CoC and the Ld. NCLT.

9. Rejoinder of Appellant against the Reply of the Resolution

Professional

a) In its rejoinder to the Reply of the Resolution Professional, the

Appellant vehemently denied that the Appellant accepted the non-

verification of the un-crystallised amount. On the contrary, the

Appellant was denied the claim towards ₹ 39,61,54,488 towards Non-

Fund Based LC/BG Facilities, which by operation of law is a Financial

Debt. Therefore, it is clear that Respondent No.1 is taking a

contradictory stand. On the one hand, the submission of Respondent

No.1 is that the Non-Fund Based LC/BG doesn't become a Financial

Debt due to non-crystallisation.

Company Appeal (AT) (Insolvency) No. 729 of 2020 21 of 46

b) On the other hand, Respondent No. 1 submits that when the said

LC/BG devolves, the same becomes the obligation of the Appellant. It

is further denied that the said un-crystallised amount never became a

'financial debt. It is also explicitly denied that the Corporate Debtor did

not receive any material during the CIRP because of the un-crystallised

Non-Fund Based Facility. In the case of alleged non-receipt of goods,

the same was to be taken up with the supplier of the goods and not the

Bank who has issued the LC at the request of Respondent No.1. It is

submitted that Respondent No. 1 was actively operating the bank

accounts of the Corporate Debtor and was well aware of all financial

transactions, including the fact that the NFB Facility falls well within

the definition of financial debt under Section 5 (8) (h) of the IBC.

c) The Section 5 (8) (h) of the IBC provides the following:

"Section 5 (8): "financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes -

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;".

(c) The Appellant denied that there was an understanding between

the Appellant and the Respondent No. 1 that as and when the LC/BG

would devolve, the same will be paid directly to the beneficiary from the

current account of the Corporate Debtor and fresh LC/BG will be issued

as and when the request for the same was made by Respondent No. 1

Company Appeal (AT) (Insolvency) No. 729 of 2020 22 of 46 for which the amount would be debited from the current account of the

Corporate Debtor. Further, as and when any fresh LC/BG was to be

issued, the same was done on the specific request of Respondent No. 1.

This admitted arrangement is reflected in the documents annexed as

Annexure A-5 on page 111 of the Appeal.

d) The Respondent has clearly admitted that the LCs/ BGs have

been issued in favour of the beneficiary/vendors to purchase various

types of steels and other alloys. However, the respondent has failed to

appreciate that the Corporate Debtor is liable to pay the

suppliers/beneficiaries under the LCs/BG during the ÇIRP period. The

payments consequently made to such beneficiaries by debiting to the

Corporate Debtors accounts have been misconceived as recovery

towards our dues and thereby caused huge loss to the Applicant in

denying the claim.

e) It is submitted that Liberty House Group was selected as a

successful Resolution Applicant and the approved Resolution Plan had

a condition that the Resolution Applicant will provide a cover of an

equivalent amount from a scheduled bank in the event it intends to

avail NFB LC/BG Credit facilities and the same was intimated to the

IRP on 24.10.2018 which the Resolution Plan failed to fulfil. Copy of the

letter dated 24.10.2018 has been annexed and marked in the Appeal as

Annexure A-6 (Pg. 149 to Pg. 150).

Company Appeal (AT) (Insolvency) No. 729 of 2020 23 of 46

f) It is vehemently denied that the Appellant acted in a high-handed

manner. Further, upon perusal of the letter dated 30.10.2018 (page 45

of the Reply of the Respondent No. 1) written by Respondent No. 1 to

the Appellant, it is amply clear that Respondent No. 1 had accepted that

the NFB limits be subject to covering the limit by another scheduled

commercial bank which is in line with the discussions with the

Resolution Applicant and has also been mentioned as a part of

Resolution Plan. Further, it is also denied that Respondent No.1 was

only acting as the Insolvency Professional, and the management of the

Corporate Debtor was vested exclusively with the Monitoring

Committee. Further, the Email dated 21.11.2018 referred to the letter

dated 30.10.2018 sent by Amtek Auto Limited regarding the

Continuance of LC/BG Facilities of ₹ 43 Crores (NFB Limits) in the

capacity of the person-in-charge for the management of the Corporate

Debtor, and Respondent No. 1 addressed himself as the Insolvency

Professional in the said Email dated 21.11.2018. Copy of the Email

dated 21.11.2018 has been annexed and marked in the Reply filed by

Respondent No.1 as Annexure R-1 (Page 49).

g) It is submitted that while honouring the LCs/BGs issued on

behalf of the Corporate Debtor, the Appellant being the Financial

Creditor, had not unduly enriched itself. It is further reiterated that no

amount has been credited towards the loan account of the Corporate

Debtor, and the debits are relating to the payment made to the

supplier/vendor /beneficiary of LC/BG. Therefore, it is incorrect to say

Company Appeal (AT) (Insolvency) No. 729 of 2020 24 of 46 that the appellants have made a recovery of ₹ 33.34 Cr. On the contrary,

the said LCs/BGs have been issued during the CIRP period, and the

same ought to have been considered the CIRP cost because the

Corporate Debtor had received the goods under the said LCs and BGs

during the CIRP period. Therefore, the Corporate Debtor is liable to pay

the suppliers under IBC 2016.

h) The averment made by Respondent No.1 is bald, unsupported

and on the face of it unsustainable. It is submitted that in case of the

festive season which is during October/November in any given year, for

the sales to be successful the raw material required by the Automobile

companies are always supplied well in advance or a few months in

advance to the festive season and not at the time of the season.

Moreover, the admission on the part of the respondent in availing

working capital, not treating the same as preferential debt, non-

arranging the appropriate action in raising the fund and denial of

making payment to suppliers during the CIRP period by the Respondent

No.1 itself shows the cause for the hardship allegedly faced by the

Corporate Debtor.

i) It is specifically averred that the discussion between Appellant

and Respondent No.1 was neither affirmed nor concluded. It is further

submitted that the Reply of Respondent No.1 clearly states that the

issues discussed in the Email dated 21.11.2018 were to be further

deliberated, and various banking norms were to be complied such as

LC/BG charges, the procedure for an amendment to LC, etc., before

Company Appeal (AT) (Insolvency) No. 729 of 2020 25 of 46 agreeing to extend any NFB facility that could be provided afresh. The

fundamental principle of the issuance of LC is to make payment to the

supplier as and when the goods are received. The objections raised by

the respondent for making the payment to the supplier from whom the

goods have been acquired during the CIRP period and further

requesting for issuance of fresh LCs without addressing the crystalised

LCs itself establishes the ignorance of fundamental principles of

selecting the LCs.

j) That the contents of para 3 (1) of the Preliminary Objections are

wrong, incorrect and denied. It is denied that the Appellant, without

any communication to Respondent No.1, arbitrarily withdrew the NFB

Facility granted to the Corporate Debtor. In fact, the Appellant vide its

letter dated 24.10.2018 mentioned that the competent authority had

permitted for providing NFB limit of ₹ 43 crores subject to compliance

with the following condition:

"the resolution of NFB limits as proposed will be accepted subject

to a cover of an equivalent amount from a scheduled Commercial

Bank". Copy of the Letter dated 24.10.2018 is marked and

annexed in the Appeal as Annexure A-6 (Page149 to Pg. 150).

k) Respondent No. 1 is put to the strict proof on the averment that

there has been an unjust enrichment by the Appellant or undue burden

on the Corporate Debtor during the already uncertain times, to change

the collection account with 43 domestic and international customers.

Company Appeal (AT) (Insolvency) No. 729 of 2020 26 of 46 The availing of the LC8 facility during the CIRP period, not considering

the same as preferential debt, not- making/objecting for making

payment to the supplier under the LC during the CIRP period, and the

admission on the part of Respondent No. 1 in shifting the collection

account to another Bank, i.e. Axis Bank to avoid payment to the

supplier under the LCs from whom the goods have been received during

CIRP period, processed and sold to its customer is establishing an act

of diversion of the fund and unlawful enrichment of corporate debtor is

not paying the goods supplied during the CIRP for the reasons best

known to Respondent No. 1 despite acting against the provisions of the

Code and causing loss to the Appellant.

l) The Appellant further denied that the actions of recovery of ₹

33.34 crores by the Appellant is unjust enrichment of ₹ 33.34 crores

from the Corporate Debtor during the CIRP and is contrary to the

mandate under Section 17 and 14 of the IBC and reiterated and

reaffirmed that the payments were made directly to the vendors. No

amount was appropriated or adjusted by the Appellant towards any

outstanding claim under CIRP.

m) Respondent No. 1 further contends it had never objected to

alleged illegal recovery for more than one year before any of the CoC

until the 31st CoC dated 7.2.2020. Respondent No. 1, without placing

all the facts and records before the CoC, particularly his various

8 Letter of credit facility

Company Appeal (AT) (Insolvency) No. 729 of 2020 27 of 46 requests for debiting the current account of Corporate Debtor or issuing

fresh LC/BG9, misinformed the CoC about the correct fact. Thus,

having misled the CoC, Respondent No.1 is foisting their illegal action

on the CoC members. The Appellant further denied that no reservation

was shown or recorded in the CoC minutes on behalf of the Appellant.

The CoC meeting dated 07.02.2020 records the objections raised by the

Appellant at para (n) of the CoC meeting. On the contrary, Respondent

No. 1, in a malafide and violation of the principles of IBC,

misrepresented to the CoC by giving it a colour of recovery of LCs made

by Appellant from the corporate debtor during CIRP and to accord

interim finance status to ₹ 34 Crores towards the rejected LC directly

paid from the current account of the Corporate Debtor, and fresh

LC/BG were issued for the freed limit under the instructions of

Respondent No. 1. The Appellant further submitted that vide its letter

dated 20.02.2020, it had objected to the acts of Respondent No. 1. made

it clear that the LCs availed by the Corporate Debtor were like a

contingent liability. The amounts were being paid directly to the

vendors/suppliers of the Corporate Debtor by the Appellant. They

reiterated that no payment was appropriated or adjusted by the

Appellant towards any outstanding claim under CIRP.

n) The IA. No. 222/2020, filed by the Appellant, was to seek

direction to the IRP not to form or illegally suggest to the COC to deduct

the amount of Rs. Thirty-four crores from the total amount allocated in

9 Bank Guarantee

Company Appeal (AT) (Insolvency) No. 729 of 2020 28 of 46 the Resolution Plan towards payment to the Appellant as per the

allocation sheet. It is submitted that the Appellant is one of the

dissenting Secured Creditors who has been allotted the 'Liquidation

value' as per the allocation sheet and, therefore, approved by the CoC.

The IRP rejected the claim amount of ₹ 39.61 crores only because the

same was not crystallised.

o) The observations of the Hon'ble NCLT in the Order dated

09.07.2020 are contrary to records and erroneous to the extent that the

Appellant consented to deduction of the amount of ₹ 33.34 crores, and

the Appellant nowhere disputed the distribution of amounts payable to

the Appellant being a dissenting creditor under the terms of the

Resolution Plan of Respondent No. 2 and 3. The Appellant raised

objections against the rejection of ₹ 34 Crores by the IRP in the 31st CoC

meeting and the Email dated 20.02.2020 as mentioned in the preceding

paragraphs.

10. ANALYSIS

10.1 Admittedly IA 222/2020 was filed u/s 60 (5) of the IB Code before the

Adjudicating Authority to modify the Resolution Plan, which the Committee

of Creditors approved with more than the required percentage, i.e. 70.07% of

vote share, wherein the Appellant was also a member. However, it dissented

with the said approval.

Company Appeal (AT) (Insolvency) No. 729 of 2020 29 of 46 10.2 The Appellant contends that the Resolution Plan of 'DVI' does not

comply with Regulations 42 and 44 of the Insolvency and Bankruptcy Board

(Liquidation Process) Regulations 2016.

10.3 Appellant contends that the payment by honouring LCs was to the

vendors of the CD10, who happened to be the ultimate beneficiaries. As such,

when the bills became due after debiting the current account of the Corporate

Debtor amounting to ₹ 34 crores, the said action cannot be treated as recovery

by the Applicant and cannot be deducted from the final payment to be made

to the Applicant as per the scheme of distribution of amount under the

Resolution Plan. It is further stated that the amounts of ₹ 6,22,58,072.64

towards LCs payment and ₹ 61,39,000 towards Bank Guarantee payment are

to be included in the total admitted claim of the Applicant.

10.4 The learned Adjudicating Authority has rejected the Application with

the following observation;

"the decision of the COC passed with the required majority percent is as per the Code, are binding on all the stakeholders, including the dissenting members of the Committee of creditors, if any. No member of the Committee of creditors, after a resolution plan was approved by the Committee of creditors with the required majority percentage, on one ground or other, cannot challenge the said decision of the Committee of creditors. It is for the Adjudicating Authority to apply its judicious mind whether a particular plan submitted for its approval is in compliance of the provisions of the Code and the Regulations made thereunder. The Applicant even in its

10 Corporate debtor

Company Appeal (AT) (Insolvency) No. 729 of 2020 30 of 46 rejoinder, to the Reply filed by the resolution professional, has not denied the fact of deliberations and acceptance of the action of the resolution professional for deducting the amount of ₹ 34 crores and further distribution of amount payable to the Applicant under the resolution plan of DVI, by the Committee of creditors, wherein the Applicant is a member."

10.5 ₹ ₹ Before proceeding further, it is necessary to go through the

provisions Regulations 42 and 44 of the Insolvency and Bankruptcy Board of

India (Liquidation Process) Regulations 2016 along with Section 53 of the I &

B Code, which is given below for ready reference;

The Insolvency and Bankruptcy Board of India (Liquidation Process)

Regulations 2016

42. Distribution.--(1) Subject to the provisions of Section 53, the liquidator shall not commence distribution before the list of stakeholders and the asset memorandum has been filed with the Adjudicating Authority.

(2) The liquidator shall distribute the proceeds from realisation within [ninety days] from the receipt of the amount to the stakeholders.

(3) The insolvency resolution process costs, if any, and the liquidation costs shall be deducted before such distribution is made.

44. Completion of liquidation.--

[(1) The liquidator shall liquidate the corporate debtor within a period of one year from the liquidation commencement date, notwithstanding pendency of any application for avoidance of transactions under [* * *] Part II of the Code, before the Adjudicating Authority or any action thereof:

Company Appeal (AT) (Insolvency) No. 729 of 2020 31 of 46 Provided that where the sale is attempted under sub-regulation (1) of Regulation 32-A, the liquidation process may take an additional period up to ninety days.]

(2) If the liquidator fails to liquidate the corporate debtor within [one year], he shall make an application to the Adjudicating Authority to continue such liquidation, along with a report explaining why the liquidation has not been completed and specifying the additional time that shall be required for liquidation.

Section 53 of I & B Code 2016;

53. Distribution of Assets (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following Order of priority and within such period and in such manner as may be specified, namely--

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following--

(i) workmen's dues for the period of twenty-

four months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in Section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

Company Appeal (AT) (Insolvency) No. 729 of 2020 32 of 46

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following:--

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues; (g) preference shareholders, if any; and (h) equity shareholders or partners, as the case may be. (2) Any contractual arrangements between recipients under

sub-section (1) with equal ranking, if disrupting the Order of priority under that sub-section shall be disregarded by the liquidator.

(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction. Explanation.--For the purpose of this section--

(i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same

Company Appeal (AT) (Insolvency) No. 729 of 2020 33 of 46 class of recipients, if the proceeds are insufficient to meet the debts in full; and

(ii) the term "workmen's dues" shall have the same meaning as assigned to it in Section 326 of the Companies Act, 2013 (18 of 2013).

10.6 In the case of Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset

Reconstruction Co. Ltd., (2021) 9 SCC 657: (2021) 4 SCC (Civ) 638: 2021 SCC

OnLine SC 313 at page 698 Hon'ble Supreme Court has held;

65. Bare reading of Section 31 of the I&B Code would also make it abundantly clear that once the resolution plan is approved by the Adjudicating Authority, after it is satisfied, that the resolution plan as approved by CoC meets the requirements as referred to in sub-section (2) of Section 30, it shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders. Such a provision is necessitated since one of the dominant purposes of the I&B Code is revival of the corporate debtor and to make it a running concern.

66. The resolution plan submitted by the successful resolution applicant is required to contain various provisions viz. provision for payment of insolvency resolution process costs, provision for payment of debts of operational creditors, which shall not be less than the amount to be paid to such creditors in the event of liquidation of the corporate debtor under Section 53; or the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the Order of priority in sub-section (1) of Section 53, whichever is higher. The resolution plan is also required to provide for the payment of debts of financial creditors, who do not vote in

Company Appeal (AT) (Insolvency) No. 729 of 2020 34 of 46 favour of the resolution plan, which also shall not be less than the amount to be paid to such creditors in accordance with sub- section (1) of Section 53 in the event of a liquidation of the corporate debtor. Explanation 1 to clause (b) of sub-section (2) of Section 30 of the I&B Code clarifies for the removal of doubts that a distribution in accordance with the provisions of the said clause shall be fair and equitable to such creditors. The resolution plan is also required to provide for the management of the affairs of the corporate debtor after approval of the resolution plan and also the implementation and supervision of the resolution plan. Clause

(e) of sub-section (2) of Section 30 of the I&B Code also casts a duty on RP to examine that the resolution plan does not contravene any of the provisions of the law for the time being in force.

****

93. As discussed hereinabove, one of the principal objects of the I&B Code is providing for revival of the corporate debtor and to make it a going concern. The I&B Code is a complete Code in itself. Upon admission of petition under Section 7 there are various important duties and functions entrusted to RP and CoC. RP is required to issue a publication inviting claims from all the stakeholders. He is required to collate the said information and submit necessary details in the information memorandum. The resolution applicants submit their plans on the basis of the details provided in the information memorandum. The resolution plans undergo deep scrutiny by RP as well as CoC. In the negotiations that may be held between CoC and the resolution applicant, various modifications may be made so as to ensure that while paying part of the dues of financial creditors as well as operational creditors and other stakeholders, the corporate debtor is revived and is made an

Company Appeal (AT) (Insolvency) No. 729 of 2020 35 of 46 on-going concern. After CoC approves the plan, the adjudicating authority is required to arrive at a subjective satisfaction that the plan conforms to the requirements as are provided in sub- section (2) of Section 30 of the I&B Code. Only thereafter, the adjudicating authority can grant its approval to the plan. It is at this stage that the plan becomes binding on the corporate debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. The legislative intent behind this is to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that is permitted, the very calculations on the basis of which the resolution applicant submits its plans would go haywire and the plan would be unworkable.

102.1. That once a resolution plan is duly approved by the adjudicating authority under sub-section (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the adjudicating authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan.

10.7 It is important to mention that the resolution professional admits in its

Reply that it had suggested the COC two options to either treat the illegal

recovery is made by the Appellant as interim finance under the IB Code or

sent to deduction of the amount of illegally recovered amount by the

Appellant, out of distribution amount payable to the Appellant under the

Company Appeal (AT) (Insolvency) No. 729 of 2020 36 of 46 Resolution Plan. Accordingly, the COC, upon deliberation, consented to

deduction of the said amount from the distribution amount owed to the

Appellant under the Resolution Plan submitted by Respondents No. 2 & 3 in

the 30th and 31st Meeting of the COC held on 5 February 2020 on 7 February

2020 respectively.

10.8 The question as to what may be the interim finance was to be first

decided by the Resolution Professional in terms of Section 5 (15) of the IB

Code provides that "interim finance means any financial debt raised by

the Resolution Professional during the Insolvency Resolution Process

and such other debt as may be notified".

It is further necessary to see whether the alleged amount could have

been treated as 'Insolvency Resolution Process cost' was to be decided in

Section 5 (13) of the Insolvency and Bankruptcy Code 2016, which defines

the term "Insolvency Resolution Process cost".

Sec 5 (13) provides that "Insolvency Resolution Process costs"

means--

(a) the amount of any interim finance and the costs incurred in raising such finance; (b) the fees payable to any person acting as a Resolution Professional; (c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern; (d) any costs incurred at the expense of the

Government to facilitate the insolvency resolution process; and

(e) any other costs as may be specified by the Board;

Company Appeal (AT) (Insolvency) No. 729 of 2020 37 of 46 10.9 It is further necessary to mention that the Resolution Professional has

in its Reply admitted that in terms of duty cost upon him under Sections 20

and 25 of the Code to continue and maintain the business of the Corporate

Debtor as a going concern, it had requested the Appellant to continue and

sustain the Non-Fund-Based Facility11 limits at the existing level at being

drawn by the Corporate Debtor prior to the insolvency commencement date.

The said request was made on account of the business requirement of the

Corporate Debtor. The RP further stated that the Corporate Debtor is engaged

in the manufacturing, fabrication, and engineering automotive parts. As part

of its business, it must purchase various steel and other alloys. As per the

existing market practice, the purchase and procurement of steel and alloys

are always backed by a Letter of Credit Bank Guarantee issued by the

purchaser's Bank in favour of the beneficiary vendor, and thus the

continuation of the NBF Facility by the Appellant was very much needed as a

lifeline for the continuation of the business of the Corporate Debtor as a going

concern.

10.10 After the above statement of the RP in its Reply, it is clear that based

on the instructions of the RP given maintaining the business of corporate

debtor as a going concern, the continuation of the non-fund-based facility by

the Appellant in terms of the letter of credit bank guarantee issued by the

appellant bank in favour of the beneficiary vendor was undisputedly

Insolvency Resolution Process cost and was extended as interim finance

during CIRP.

11

NBF Facility

Company Appeal (AT) (Insolvency) No. 729 of 2020 38 of 46 10.11 However, the Resolution Professional left it to the discretion of CoC to

either treat the alleged amount as an 'interim finance' under the IB Code or

deduct that amount out of the distribution amount payable to the Appellant

under the Resolution Plan of Respondent No. 2 and 3.

10.12 It is pertinent to mention that Section 25 of the Code provides the

duties of the Resolution Professional. Under Section 25(2)(c), the RP must

raise interim finance subject to the approval of the Committee of Creditors

under Section 28 of the Code. Further, under Section 20 (2) (1) &(2)(c) of the

Code, the IRP/RP is duty-bound 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. For this purpose,

IRP/RP is entitled to raise interim finance.

10.13 In the instant case, RP has admitted that it had requested the

Appellant to continue and maintain the non-fund-based facility limits under

'The Letter of Credit Bank Guarantee' at the current level 'as being drawn

by the Corporate Debtor prior to the insolvency commencement date'.

10.14 Therefore, the payment of the said amount to the vendors of the

Corporate Debtor on the instructions of the RP against the 'Letter of Credit

Bank Guarantee' during CIRP should not have been deducted from out of the

payment of the Appellant, which was allotted to it's share under the approved

Resolution Plan. However, this payment was against the 'Letter of Credit

Bank Guarantee, to the suppliers of the Corporate Debtor, who continued

the supply of goods to the Corporate Debtor to keep the Corporate

Company Appeal (AT) (Insolvency) No. 729 of 2020 39 of 46 Debtor as going concerned. Therefore, it would have been better if the RP

had advised the COC about the correct legal position of the interim finance

so that the COC could have taken the proper decision in this regard.

10.15 However, the RP himself concedes that the continuation of the NFB

Facility by the Appellant was very much needed as a lifeline for the

continuation of the Corporate Debtor's business as a going concern. Still,

despite that, RP asked the COC to decide whether the amount extended

to the Corporate Debtor during CIRP to keep it at a going concern should

be treated as interim finance or not.

10.16 It is further made clear that Payment of CIRP cost in priority to other

debts is mandatory u/s 53(1) of the Code. Therefore, given Section 30 (4) of

the IB Code, COC is empowered to fix the Order of priority amongst creditors

as laid down under Section 53 (1). However, permissibility about the

deduction of CIRP cost from the amount allotted under the approved

Resolution Plan is not covered under Section 30 (4) of the Code.

10.17 In the instant case, Resolution Professional has admitted that it had

suggested the COC two options, to either treat the recovery made by the

Appellant as interim finance under IB code or deduct the amount illegally

recovered by the Appellant, out of distribution amount payable to the

Appellant under the Resolution Plan. Thus, it is clear that RP failed to exercise

its jurisdiction to decide the issue of CIRP cost and left it to the CoC to decide

whether the amount incurred in keeping the Corporate Debtor as a going

concern, by the continuation of letter of credit bank guarantee facility during

Company Appeal (AT) (Insolvency) No. 729 of 2020 40 of 46 the CIRP would be treated as interim finance. However, it was the duty of

IRP/RP itself to decide the CIRP cost. After that, instead of taking advice from

the COC for treating the said expenses as interim finance, he should have

obtained sanction from the CoC for making the payment of the expenses

incurred during the CIRP. Hence, he should have made the payment of CIRP

costs. But, instead of exercising its duty to make payment of the CIRP costs,

RP had advised CoC to deduct that amount from out of the payment payable

to Appellant under the Approved Resolution Plan.

10.18 The RP has further stated that vide its letter dated 30 October 2018,

the Appellant was requested to continue their NFB facility without insisting

on the condition as stipulated until the resolution plan of "LHG"12 is

implemented. It was also pointed out that withdrawal of their NFB facility at

that stage would cause an adverse impact on the operations of the Corporate

Debtor as going concerned. However, without responding to the said request

and considering the same in an arbitrary manner by misusing its power and

position imposed auto-debit instructions, the Appellant started debiting the

collection account of the Corporate Debtor maintained by the Appellant Bank

and made recovery of an aggregate amount of ₹ 33.34 crores. However, the

appellant Bank withdrew their NFB facility granted by it to the Corporate

Debtor while recovering a further amount of ₹ 33.34 crores from the collection

account of the Corporate Debtor. Therefore, the said action of the Appellant

during the CIRP is contrary to the instructions of the RP is against the

mandate of Section 17 (1)(d) of the Code.

12

LBG- 'Liberty House Group' Company Appeal (AT) (Insolvency) No. 729 of 2020 41 of 46 10.19 Section 17(1)(d) of the IBC provides that "the financial institutions

maintaining the accounts of the corporate debtor shall act on the instructions of

the interim resolution professional in relation to such accounts and furnish all

information relating to the corporate debtor available with them to the interim

resolution professional".

10.20 It is pertinent to mention that Section 17 of the Code relates to the

management of the affairs of the Corporate Debtor by an Interim Resolution

Professional. Therefore, the phrase used in Section 17 (1) (d) of the IBC that

financial institution "shall act on the instructions of the IRP" does not mean

that it authorises IRP/RP to compel the financial institution for

maintaining the accounts of the CD to continue the NFB facility

comforted by Bank Guarantee. Therefore, non-compliance with such

instructions of RP can not be considered a violation of Section 17 (1) (d) of the

Code.

10.21 The learned Counsel for the Respondent RP emphasised that Section

30 (4) of the IBC cast a role to supervise distribution amongst all creditors on

the COC, and the IRP had no say in that.

10.22 Section 30(4) of IB Code provides that "the committee of creditors may

approve a resolution plan by a vote of not less than sixty-six per cent of voting

share of the financial creditors, after considering its feasibility and viability the

manner of distribution proposed, which may take into account the order of

priority amongst creditors as laid down in sub-section (1) of Section 53,

Company Appeal (AT) (Insolvency) No. 729 of 2020 42 of 46 including the priority and value of the security interest of a secured creditor,

and such other requirements as may be specified by the Board"

10.23 Given section 30 (4) of the IB Code, it is clear that the Committee of

Creditors may approve a resolution plan with 66% voting share after

considering its feasibility and viability. The manner of distribution

proposed may take into account the Order of priority amongst creditors as

laid down under Section 53 (1) of the Code. But for fixing the Order of priority,

the COC has to consider the priority given under Section 53 (1) of the Code.

Section 53(1) (a) provides 1st priority for paying Insolvency Resolution

Process costs and liquidation costs in full.

10.24 The respondent RP has admitted that a Letter of Credit Bank

Guarantee has been issued favouring the beneficiary/vendor to purchase

various steels and other alloys to keep the CD as a going concern. However,

the Respondent RP has failed to appreciate that the Corporate Debtor is liable

to pay the suppliers/beneficiaries under the LCs/BG during the CIRP period.

The payments consequently may be made to beneficiaries by debiting to the

Corporate Debtor's account have been misconceived as recovery towards

Appellant's dues and thereby caused massive loss to the Appellant /

Applicant in denying its claim.

10.25 It is pertinent to mention that the approved Resolution Plan of 'LHG'

had a condition that the Resolution Applicant will provide the cover of an

equivalent amount from a scheduled bank in the event it intends to avail Non-

Company Appeal (AT) (Insolvency) No. 729 of 2020 43 of 46 Fund Based, LC/BG credit facilities and the same was intimated to the RP on

24 October 2018, which the Resolution Plan failed to fulfil.

10.26 Respondent No. 1, in its Reply, had accepted that NFB limits be

subject to covering the limits by the Scheduled Commercial Bank, which is

in line with the discussions with the Resolution Applicant and has also been

mentioned as a part of the Resolution Plan.

10.27 It is also clear that while honouring the LCs and BGs issued on behalf

of the Corporate Debtor, the Appellant being the Financial Creditor, it had not

unduly enriched itself. No amount has been credited towards the loan

account of the Corporate Debtor, and the debit transactions are related to the

payments made to the supplier/vendor/beneficiary of LC/BG. Therefore, it is

incorrect to say that the appellants have made a recovery of ₹ 33.34 crores.

On the contrary, the said LCs/BCs continued during the CIRP period. The

payment was made to the suppliers of the CD on the instructions of the RP

to keep the CD as a going concern. Therefore, the same ought to have been

considered CIRP cost, and the Corporate Debtor has received the goods under

the said LCs and BG's during the CIRP period. Therefore, the corporate Debtor

is liable to pay the suppliers under IBC 2016.

10.28 It is necessary to point out that Sec 53(1) of the IBC mandates the

priority of payment for the Insolvency Resolution Process Cost and the

Liquidation costs. However, in the instant case, IRP/RP firstly insisted the

Appellant Bank continue Letter of Credit Bank Guarantee Facility during

CIRP at the current level to keep the Corporate Debtor as a going concern.

Company Appeal (AT) (Insolvency) No. 729 of 2020 44 of 46 But after that, RP made an erroneous recommendation to the CoC to either

consider payment against LC/BG as CIRP Cost or deduct that amount from

out of the amount allotted to the Appellant's share under the Approved

Resolution Plan.

10.29 Based on the above, it is clear that the Appellant never recovered any

amount from the payment of ₹ 34 crores, as has been misrepresented by

Respondent No. 1. The Adjudicating Authority vide its impugned Order

observed that the Appellant has not objected to the said actions of

Respondent No. 1 in the COC meetings is contrary to the materials placed

before the Adjudicating Authority. Furthermore, the Appellant had refuted

the actions of respondent No. 1 vide its Email dated 20 February 2020, which

the Adjudicating Authority has overlooked. Therefore, the Adjudicating

Authority has misconstrued the payment made to the Appellant's

beneficiaries/vendors as recovery and dismissed the IA 222 of 2020 in CP (IB)

No.42/Chd/Hry/2017.

10.30 In the circumstances stated above, we have concluded unanimously

that the Appeal deserves to be partly allowed with the following directions.

ORDER Company Appeal (AT) (insolvency) No 729 of 2020 is partly allowed. No

order as to costs.

We further direct Respondent No. 1, Resolution Professional, not to

deduct the amount of ₹ 34 crores, i.e. the amount which has been paid to the

vendors of the Corporate Debtor against the 'Letter of Credit Bank Guarantee'

Company Appeal (AT) (Insolvency) No. 729 of 2020 45 of 46 facility, which continued during the corporate insolvency process period,

under the instructions of the Respondent No. 1 /Resolution Professional to

keep the Corporate Debtor as a going concern, is the CIRP costs. Therefore,

it cannot be deducted from the final payment to the Appellant/Applicant as

per the scheme of distribution of the amount under the approved Resolution

Plan.

No order as to costs.

[Justice M. Venugopal] Member (Judicial)

[V. P. Singh] Member (Technical)

[Dr. Alok Srivastava] Member (Technical) NEW DELHI 27th January, 2022

pks

Company Appeal (AT) (Insolvency) No. 729 of 2020 46 of 46