West Coast Mills Limited vs Bijay Murmuria

(Arising out of the Order dated 27.09.2019 passed by the National Company Law Tribunal, Kolkata Bench, Kolkata in CA (IB) No. 736/KB/2019 in CP (IB) No. 61/KB/2018)

IN THE MATTER OF: West Coast Paper Mills Ltd. Having its registered office at: P.B. No. 5, Bangur Nagar, Dandeli- 581325, District- Uttar Kannada, Karnataka. ...Appellant

Versus

1. Bijay Murmuria, Resolution Professional of Fort Gloster Industries Ltd. Sumedha Fiscal Services Ltd., 8B Middleton Street, 6A Geetanjali, Kolkata- 700071.

2. Committee of Creditors Through Stressed Assets Stabiliozation Fund Having its registered office at: 3rd Floor, IDBI Tower, WTC Complex, Cuffe Parade, Mumbai- 400005.

3. Gloster Limited Having its registered office at: 21, Strand Road, Kolkata ...Respondents West Bengal- 700001.

Present:

For Appellant: Mr. Sidharth Sharma, Mr. Arjun Asthana, Advocates.

For Respondents: Mr. Anand Varma, Mr. Ayush Gupta, Advocates for RP/R1. Mr. Shaunak Mitra, Mr. Anil Agarwalla, Ms. Neha Sharma, Advocates for R-3/SRA.

Company Appeal (AT) (Ins.) No. 1272 of 2019 -2-

J U D G E M EN T (13th May, 2024)

INDEVAR PANDEY, MEMBER (TECHNICAL)

This appeal has been filed under Section 61(3) of Insolvency and

Bankruptcy Code (in short 'IBC') challenging the impugned order of National

Company Law Tribunal, Kolkata Bench, Kolkata (in short 'Adjudicating

Authority) in CA (IB) No. 736/KB/2019 in CP (IB) No. 61/KB/2018 (in short

main Insolvency application) passed on 27th September, 2019. By this order,

Adjudicating Authority rejected the claim of the Appellant to be treated on

par with other Financial Creditors and to make the Appellant eligible for

distribution of claims as per Resolution Plan.

2. One Jayanta Kumar Panja, an ex-employee of Fort Gloster Industries

Limited (Corporate Debtor) filed an application under Section 9 of the

Insolvency and Bankruptcy Code, 2016 (in short IBC) for initiation of the

Corporate Insolvency Resolution Process on account of default in payment of

Rs.1,13,946/- towards his gratuity. The said application bearing CP (IB)

No.61/KB/2018 was admitted by the Adjudicating Authority (National

Company Law Tribunal, Kolkata Bench, Kolkata) on 09.08.2018. Manish

Jain was appointed as the Interim Resolution Professional (IRP) who was

replaced by Bijay Murmuria as the Resolution Professional (RP) in the

second meeting of Committee of Creditors (CoC) held on 04.12.2018.

3. The RP published Form-G on 05.02.2019 in financial express

(English) and in Aajkaal (Bengali) for the purpose of inviting Expression of

Company Appeal (AT) (Ins.) No. 1272 of 2019 -3-

Interests (EOIs) in which the last date for submission of EOIs was

20.02.2019. The RP received EOI from two Prospective Resolution

Applicants (PRAs) on 20.02.2019 i.e. Prudent ARC Limited and Gloster

Limited. In the meanwhile, M/s Hooghly Infrastructure Pvt. Ltd. also filed an

application towards EOI. The said application was allowed by the

Adjudicating Authority vide order dated 01.04.2019. Thereafter, two

resolution plans from M/s Gloster Limited and M/s Hooghly Infrastructure

Pvt. Ltd. were received by the RP till the last date of submission of resolution

plan i.e. 06.04.2019 (17:00 PM). The RP received the forensic audit/due

diligence report of the Corporate Debtor from the Auditor, namely, V. Singhi

& Association, Chartered Accountants on 10.04.2019 in which it was stated

that there were no preferential transactions, undervalued transactions,

transaction defrauding creditors, extortionate credit transactions,

fraudulent trading or wrongful trading. The RP apprised the members of the

CoC in the 6th meeting about the plans received from the PRAs. It was also

brought to their notice that the resolution plan received from M/s Hooghly

Infrastructure Pvt. Ltd. had certain inconsistencies in terms of the

provisions of the Code. Both the Resolution Applicants submitted their

updated resolution plan by 5:00 PM on 19.04.2019 and the corresponding

hard copies by 12:00 noon on 20.04.2019. A certificate was given by

Saumendra Kabiraj, Advocate that both the Resolution Applicants were

eligible in terms of the provisions of Section 29A of the Code but Gloster

Limited scored 51 in the terms of qualitative criteria and quantitative criteria

of the evaluation matrix as against the score of 30 obtained by M/s Hooghly

Infrastructure Pvt. Ltd. And thus, the members of the CoC unanimously

Company Appeal (AT) (Ins.) No. 1272 of 2019 -4-

declared Gloster Limited as H1 bidder for the Corporate Debtor. The

resolution plan of the Gloster Limited, having been declared as H1 was put

to vote through e-voting which was approved by 73.21% voting in which

Pegasus Asset Reconstruction Pvt. Ltd., Punjab National Bank & Andhra

Bank voted in favour of plan whereas Stressed Assets Stabilization Fund

with 26.79% voting share voted against it.

4. The RP filed an application bearing CA (IB) No. 584/KB/2019 under

Section 30(6) of the Code before the Adjudicating Authority for seeking

approval of the resolution plan of the Fort Gloster Industries Ltd. (CD)

submitted by Successful Resolution Applicant (SRA). Adjudicating Authority

by a single order dated 27.09.2019 (Impugned Order) decided the claims of

various categories of claimants and also approved the Resolution Plan.

Submission of the Appellant:

5. The Appellant West Coast Paper Mills Ltd., is a limited Company

having its registered Office in district Uttar Kannada, Karnataka. The

Corporate Debtor, M/s Fort Gloster Industries Ltd has its Offices in Kolkata

and is involved in the business of manufacture of jute hessian, gunny bags,

all types of rubber and PVC cables etc.

6. The claim of the Appellant is that an amount of Rs. 7,15,41,918/-

(Rupees Seven crores, fifteen lakhs, forty-one thousand, nine hundred

eighteen only) was paid by them on behalf of Corporate Debtor to KDCC

Bank Ltd., due to default by the Corporate Debtor and Corporate Guarantee

Bond executed by the Appellant. This payment was made on 25.08.2014.

The said amount was transferred into a short term inter-corporate deposit

Company Appeal (AT) (Ins.) No. 1272 of 2019 -5-

and Corporate Debtor routinely issued balance confirmation to the

Appellant.

7. After the initiation of CIRP against the Corporate Debtor, the

Appellant filed its claim amounting to Rs. 89,20,02,003.54/- (Rupees

Eighty-nine Cores, Twenty Lakhs, Two Thousand and three, paise fifty-four

only) which included apart from principal, interest @ 18% per annum. The

Appellant claimed before the Adjudicating Authority that he should be

treated on par with other Financial Creditors and should be eligible for equal

pro rata distribution as per Resolution Plan, which has not been done and

no amount has been provided for him. He contended that Resolution Plan is

contrary to the provision of IBC and is liable to be rejected.

8. The appellant submitted that the Adjudicating Authority has rejected

his claim to be treated on par with unrelated Secured Financial Creditors,

rather he has been equated with equity shareholders by the order of

Adjudicating Authority. The relevant paragraph-75 of the impugned order

reads as under:

...

"75. A joint reading of the order directing modification, the Appellate Tribunal judgment and the final order of the Hon'ble NCLT, Allahabad Bench, it appears to us that there is nothing in the judgment showing that an unrelated secured financial creditor is equated with a related financial creditor of the CD. What is observed is clear. The NCLT Bench on the other hand equated a related party with that of equity shareholders or partners as provided under section 53(1) (h) of the Code and ranked lower in level than the obligation due to unrelated financial

Company Appeal (AT) (Ins.) No. 1272 of 2019 -6-

creditors. Non allocation of fund by the resolution applicant, in the case in hand to the related party of the Corporate Debtor do not contravene the water fall mechanism as provided in Section 53(1)(h) of the Code, 2016. Therefore, we do not find any discrimination in the treatment given to the applicant by the resolution applicant. Accordingly, the objection in that regard also appears to be not sustainable under Law."

9. The appellant has raised a fundamental question of law, i.e., "Whether

a related party Financial Creditor can be equated with the equity

shareholder of the Corporate Debtor? Which inter-alia means that the

liquidation value due to a related party financial creditor shall be in

accordance with Section 53(1)(h) of the IBC and not in accordance with

Section 53(1) (d) of the IBC under the waterfall mechanism.

10. The appellant stated that the impugned judgment is ex facie illegal

and in teeth of the judgment passed by Hon'ble Supreme Court in M.K.

Rajagopalan (supra) inasmuch as the Hon'ble Supreme Court has

categorically rejected the reasoning attributed by the Ld. Adjudicating

authority in the present case to dismiss the application being C.A. No.

736/KB/2019.

11. It is further submitted that Appellant, despite being a financial

creditor, although related party to the Corporate Debtor, was never provided

with minutes of any meeting of the Committee of Creditor ('CoC') of

Corporate Debtor.

Company Appeal (AT) (Ins.) No. 1272 of 2019 -7-

12. The appellant contends that the Adjudicating Authority, while passing

the impugned judgment, held that a related party financial creditor should

be equated with the equity shareholder of the corporate debtor under the

CIRP. Further, the Adjudicating Authority in the impugned order held that

the liquidation value due to a related party Financial Creditor shall be in

accordance with Section 53(1)(h) of the I & B Code, 2016 and not in

accordance with Section 53(1)(d) of the I & B Code, 2016 under the water

fall mechanism.

13. The appellant further submits that the reasons attributed by the

Adjudicating Authority in the impugned order in para 75 (supra) are in teeth

of the judgment passed by the Hon'ble Supreme Court in M.K. Rajagopalan

(supra). He has invited attention to paras 201 to 203 of the aforesaid

judgment, which are reproduced below:

"201. After taking note of the fact that related party is prohibited to be a part of CoC and is further prohibited to be a resolution applicant or an authorized representative etc., the Appellate Tribunal has rightly observed that involvement of a related party in CIRP in any capacity was seen as giving unfair benefit to the corporate debtor; and that the statutory recognition of related party as a different class would apply even to resolution plan when CoC would decide whether in its commercial wisdom it should pay to related party at all because that would mean paying to the same persons who are behind the corporate debtor. However, thereafter the Appellate Tribunal proceeded to observe that related party was required to be equated with the promoters as equity share-holders and then, further made certain observations about discrimination between related party unsecured financial creditor and other unsecured financial creditors as also between related party operational creditor and other operational creditors. Such far-stretched observations of the Appellate

Company Appeal (AT) (Ins.) No. 1272 of 2019 -8-

Tribunal are difficult to be reconciled with the operation of the statutory provisions.

202. It has rightly been argued on behalf of the appellants and had rightly been observed by the Adjudicating Authority (vide extraction in paragraph 15.4.1 hereinabove) that there was no provision in the Code which mandates that the related party should be paid in parity with the unrelated party. So long as the provisions of Code and CIRP Regulations are met, any proposition of differential payment to different class of creditors in the resolution plan is, ultimately, subject to the commercial wisdom of CoC and no fault can be attached to the resolution plan merely for not making the provisions for related party.

203. On the facts of the present case, we find no reason to discuss this matter any further when it is noticed that the promoter and erstwhile director, the contesting respondent before us, has been holding the position of Chairman of the said related party. Suffice it would be to observe for the present purpose that the Appellate Tribunal has erred in applying the principles of non-discrimination and thereby holding against the resolution plan in question for want of provision for related party."

14. The appellant has drawn the attention to the aforesaid observations of

the Hon'ble Supreme Court in M.K. Rajagopalan (supra), where it is

apparent that equating related party financial creditor with promoters as

equity shareholders is far stretched and difficult to be reconciled with the

operation of the statutory provisions.

15. Accordingly, the appellant has pleaded that the impugned judgment

has been premised upon erroneous and wrong reasoning which is in teeth of

the observations passed by the Hon'ble Supreme court in M.K. Rajagopalan

(supra). As a consequence of equating the appellant at par with Equity

shareholders, the appellant has been illegally and wrongly discriminated in

as much as the claims of Central Government and the State Government;

Company Appeal (AT) (Ins.) No. 1272 of 2019 -9-

secured creditors who have exercised their enforcement rights; remaining

debts and dues and preference shareholders have been illegally and wrongly

given preference over the claim of the Appellant. Accordingly, the present

appeal deserves to be allowed and resolution plan deserves to be set aside

and/or remanded back to the CoC for ensuring that the resolution plan is

not discriminatory against the Appellant.

Submission of Respondents

16. The basic submission of RP who is Respondent No. 1 is that the

prayers sought by the appellant are impermissible under the provisions of

IBC. The appellant is a related party of Corporate Debtor, and is also an

unsecured Financial Creditor. The appellant is not being paid any amount

under the resolution plan, which has been approved by CoC and thereafter

by the Adjudicating Authority vide order dated 27.09.2019. The whole class

of unsecured financial creditors (consisting of the appellant and another

related party viz. Gloster Cables Ltd.) are not being paid anything under the

said resolution plan. The secured financial creditors (none of whom are

related parties of Corporate Debtor) are being paid Rs. 64.20 crores against

their admitted claims of Rs.619.24 crores.

17. The respondent has further stated that it's a settled position of law

that a resolution plan can provide for differential payment to different

classes of creditors as laid down by the Hon'ble Supreme Court in

Committee of Creditors of Essar Steel v. Satish Kumar Gupta, (2020) 8 SCC

531, the abovesaid prayer of the appellant is manifestly impermissible in

law.

Company Appeal (AT) (Ins.) No. 1272 of 2019 -10-

18. The Respondent has further invited our attention to the same

Judgment of Hon'ble SC relied upon by the appellant viz. M.K. Rajagopalan

(supra), wherein it was held that there is no provision in IBC which

mandates that a related party should be paid in parity with unrelated

parties. Further, it was also held that no fault can be attributed to a

resolution plan merely for not making provisions for related parties. The

relevant para 202 of Hon'ble SC's aforesaid judgement is extracted in Para

13 hereinabove.

19. Respondent No. 1 has further stated that in view of the M.K.

Rajagopalan Judgment (supra) the appellant cannot seek payment under

the resolution plan in parity with secured financial creditors, who form a

different class of creditors and further a resolution plan is not mandated to

make provisions for related parties.

20. It has therefore submitted that the present appeal is completely

misconceived in both fact and law and is liable to dismissed.

21. The respondent has further stated the appellant has wrongly accused

the resolution professional of recusing from his duties under the provisions

of the IBC on account of not interfering in the distribution mechanism

provided in the resolution plan. He has submitted that RP is not empowered

to interfere in the commercial wisdom of CoC as laid down by Hon'ble

Supreme Court in 'Arcelormittal India (P) Ltd. v. Satish Kumar Gupta', (2019)

2 SCC 1, the role of the RP is limited to ensuring that the resolution plan

received by him is compliant with Section 30 (2) of the IBC before placing

the same before the Committee of Creditors for their consideration.

Company Appeal (AT) (Ins.) No. 1272 of 2019 -11-

22. The Respondent No.2 Committee of Creditors has not entered their submissions in the matter.

23. Respondent No. 3 SRA (Gloster Limited), has submitted that the

annual report and accounts of the Corporate Debtor for the year 2017-18

shows that the appellant is a promoter entity holding 33% shares in the

Corporate Debtor. The said annual report of the Corporate Debtor shows

that the West Coast at the material time was a related party.

24. Respondent No. 3 further invited attention to the Clause 32 of Section VI of the resolution plan which provides as follows: -

"32. All contracts between the Corporate Debtor and its Related Parties shall stand terminated with immediate effect without any further act, deed or instrument and all Liabilites and obligations of the Corporate Debtor to such Related Parties shall be discharged and be permanently extinguished."

Thus, under the resolution plan all claims of the related parties against the corporate Debtor stood extinguished.

25. The SRA states that CD had only two unsecured financial creditors of

the corporate debtor at the time of CIRP initiation, and the RP received claim

from both of them. Both the unsecured financial creditors at the material

time were related parties. The details of Claims filed and claims admitted by

RP of both these creditors are given below:

Name of the Claim amount filed Claim amount unsecured financial admitted creditors (a) West coast Rs. 89.20 crores Rs. 89.20 crores

(b) Gloster Cables Ltd. Rs. 15.49 crores Rs. 15.49 crores

Total Rs. 104.69 crores Rs. 104.69 crores

Company Appeal (AT) (Ins.) No. 1272 of 2019 -12-

26. The resolution plan in para 7.5 deals with unsecured financial

creditor in the following manner:

7.5. Unsecured financial creditors

7.5.1 Amount- claim filed and admitted under this head is

Rs. 104.69 crores, since the entire amount is relating to claim

made by the related parties, RA proposes to pay NIL amount

under this head".

27. The Respondent No. 3 has submitted that since no payment is

proposed to any unsecured financial creditor, there can be no question of

discrimination of unsecured financial creditor i.e. all the unsecured financial

creditors of the Corporate Debtor have received the same treatment viz. Nil

payment and there has been no discrimination what so ever amongst the

same class of creditors.

28. The respondent has further submitted that the only issue raised in

the present appeal is whether such a treatment i.e. Nil payment given to

related parties in a resolution plan is permissible under the IBC. There were

conflicted judgments of the Adjudicating Authority/ Appellate Tribunal as to

whether a related party could be discriminated viz a viz other creditors of a

same class. The entire controversy on this point is now settled by the

Judgment of the Hon'ble Supreme Court in the case of M.K. Rajagopalan

(supra).

29. The Corporate Debtor in the case of M. K. Rajgopalan (Supra) in

Hon'ble Supreme Court was Appu Hotels Ltd. and the promoters had

Company Appeal (AT) (Ins.) No. 1272 of 2019 -13-

granted nearly Rs. 100 crores as unsecured loan to the Corporate Debtor.

Under the resolution plan the related party unsecured financial creditors

were discriminated vis-à-vis other unsecured financial creditors. The

adjudicating authority rejected the objection raised by the related party

unsecured financial creditors by observing that in the scheme of the Code

there was no provision, which mandatorily required payment to the related

party in parity with the unrelated party.

30. In the appeal filed against the order of Adjudicating Authority, it was

held by Appellate Tribunal that IBC treats the related party as a separate

category for specified purposes viz. excluding from CoC under Section 21

and disqualifying them from being resolution applicant under Section 29 (A),

but IBC does not treat related party as a separate class for any other

purpose and the related parties, financial or operational creditor cannot be

discriminated against under the resolution plan, denying their right to get

payment under the resolution plan only on being a related party. The

relevant paragraph 173 of the Judgment of Appellate Tribunal is given

below:

"173. Thus, it is clear that IBC treats related parties as a separate category for specified purposes, excluding from the CoC under Section 21 and disqualifying them from being Resolution Applicants under section 29A. However, the IBC does not treat Related Party as a separate class for any other purpose. Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification. Therefore, the Related Party financial or operational creditor cannot be discriminated against under the Resolution Plan, denying their right to get

Company Appeal (AT) (Ins.) No. 1272 of 2019 -14-

payments under the Resolution Plan only on being a Related Party. It is also made clear that by getting only payment under the Resolution Plan, related party creditors could in no way sabotage the CIRP."

31. In the Judgment of Hon'ble SC in M. K. Rajagopalan (supra) the points

for determination for related party were framed by Hon'ble Supreme Court in

para 155 on the following lines:

"E. Whether the Appellate Tribunal has erred in applying the principles of non-discrimination in relation to related party of corporate debtor and thereby holding against the resolution plan in question for want of provision for related party?"

32. The respondent invites the attention to para 202 of Hon'ble Supreme

Court's judgement in M. K. Rajagopalan (supra) the relevant extracts of the

same is given below:

"202. It has rightly been argued on behalf of the appellants and had rightly been observed by the Adjudicating Authority (vide extraction in paragraph 15.4.1 hereinabove) that there was no provision in the Code which mandates that the related party should be paid in parity with the unrelated party. So long as the provisions of Code and CIRP Regulations are met, any proposition of differential payment to different class of creditors in the resolution plan is, ultimately, subject to the commercial wisdom of CoC and no fault can be attached to the resolution plan merely for not making the provisions for related party."

33. The Respondent No. 3 submits that the aforesaid Judgment of the

Hon'ble Supreme Court squarely applies to the present case, where no

payment has been provided in the resolution plan for the related parties.

Hon'ble Court conclusively held that a related party can be discriminated

Company Appeal (AT) (Ins.) No. 1272 of 2019 -15-

against vis-a-vis a non-related party and a resolution plan cannot be faulted

merely for not making provisions for related parties.

34. Respondent further submits that in the present case no payment is

proposed to be made to any unsecured financial creditor, whether related

party or unrelated party and therefore no question of discrimination arises

in the present case.

35. The respondent submits that the contention of the appellant has been

that its claim amount has not been included in the resolution plan and the

Adjudicating Authority has equated the related party with equity

shareholders and the same is not permissible under the aforesaid judgment

passed by Hon'ble Supreme Court and therefore, the aforesaid judgment

does not apply in this case. Whereas, the case of appellant challenging the

resolution plan before the Adjudicating Authority was on the ground that

the resolution plan does not provide for equal pro rata distribution of the

proceeds for the applicant as a financial creditor. The point that the

appellant has been equated with equity shareholders was made by the

appellant and not by SRA or Resolution Applicant.

36. The respondent finally submits that whether the appellant is equated

with equity shareholder or not is totally irrelevant, because it is admittedly

an unsecured financial creditor and there is no payment allocated in the

resolution plan for any unsecured financial creditor.

Company Appeal (AT) (Ins.) No. 1272 of 2019 -16-

Analysis and Findings

37. We have heard the appellant, Respondent No. 1 (Resolution

Professional) and Respondent No. 3 (SRA). The Respondent No. 2

(Committee of Creditors) though impleaded, did not make any submission.

38. The present appeal was adjourned sine-die vide an order of two

Members of this bench of Appellate Tribunal on 10.04.23 as the counsel for

the appellant relied upon the orders of two-member bench decision of this

Tribunal in the case of 'Dr. Periasamy Palani Gounder Vs.

Mr. Radhakrishnan Dharmarajan, 2022 SCC OnLine NCLAT 86' which had

been challenged in Hon'ble SC in Civil Appeal No 1682-1683 of 2022 'M. K.

Rajgiopalan Vs Dr. Periasamy Palani Gounder & Anr' and the same is

pending adjudication. The aforesaid order is reproduced below:

"10.04.2023:- Counsel for the Appellant strongly relied upon a two member bench decision of this Tribunal rendered in the case of 'Dr. Periasamy Palani Gounder Vs. Mr. Radhakrishnan Dharmarajan, 2022 SCC OnLine NCLAT 86' but also mentioned that the aforesaid said judgment is challenged in Civil Appeal No. 1682-1683 of 2022 'M.K. Rajagopalan Vs. Dr. Periasamy Palani Gounder & Anr.' which is pending adjudication before the Hon'ble Supreme Court.

2. Keeping in view of the aforesaid facts and circumstances, we are of the considered opinion that hearing of this case be adjourned sine die to await the decision in Civil Appeal No. 1682-1683 of 2022.

3. Accordingly, this case is hereby adjourned sine die to await the decision in Civil Appeal No. 1682-1683 of 2022.

4. But it is clarified that the argument of the Respondent shall be heard on all issues after the decision of the Hon'ble Supreme Court in Civil Appeal No. 1682-1683 of 2022.

Company Appeal (AT) (Ins.) No. 1272 of 2019 -17-

5. Counsel for the RP has submitted that he has already filed some documents i.e. 5th, 6th & 7th minutes of meetings of the CoC through e-filing. He has handed over the hard copy of the same, which are taken on record."

(Emphasis supplied)

39. Subsequently it was ordered to be listed for hearing on the application

filed by RP vide IA no. 3805 of 2023 after the judgement of Hon'ble Supreme

Court in M. K. Rajgopalan (Supra).

40. The following issues need to be decided in the instant appeal: -

i. Whether the appellant has been treated as equity shareholder by

the Adjudicating Authority while approving the resolution plan;

and

ii. Whether the appellant has been discriminated vis-à-vis other

Financial Creditors

41. The appellant in particular has made a reference to the order of

Adjudicating Authority disposing of their application in para 75 of the said

order where there is a mention of a related party being equated with equity

shareholders or partners as provided under Section 53 (1) (h) of the Code.

This issue has been taken in isolation by the appellant the issue under

reference relates to a judgment passed by NCLT, Allahabad Bench. The

relevant paras are Para 74 and 75 of the impugned order. The same are

reproduced below:

"74. An Unsuccessful Bidder in the above said Company Application No. 59 of 2018 filed an appeal before the Hon'ble Appellate Tribunal. The Hon'ble Appellate Tribunal in CA (AT)

Company Appeal (AT) (Ins.) No. 1272 of 2019 -18-

Insolvency No. 408 of 2018, confirmed the order of direction issued by the NCLT, Allahabad Bench directing the RP in the said case to modify the resolution plan as per the observation in the above said judgement. The Ld. Counsel also referred to us the order passed by the Hon'ble NCLT, Allahabad Bench in CP No. (IB) 13/ALD/2017 by approving the modified resolution plan wherein it is mentioned that all the Financial Creditors and Operational Creditors of the Corporate Debtor were equally treated. According to the Ld. Counsel for the applicant, the Committee of Creditors in the above said case, accepted the modified resolution plan by 100% vote share wherein the Unsecured Financial Creditors were treated at par with the Operational Creditors. To stress her argument, she relied upon paragraph no. 12 of the said judgement. It read as follows:-

"Pursuant to the liberty granted by the Hon'ble Appellate Tribunal, RLL modified its resolution plan (Modified Plan) on 17.10.2018 and the Modified Plan was discussed by COC in its meeting held on 20.09.2018. Modified terms of Resolution Plan were acceptable to Operational Creditors, Unsecured Financial Creditors. Further, pursuant to the direction of the Hon'ble Appellate Authority under order dated 20th September, 2018 the Applicant filed a Report dated 20th October, 2018 to the Hon'ble Appellate Authority."

75. A joint reading of the order directing modification, the Appellate Tribunal judgment and the final order of the Hon'ble NCLT, Allahabad Bench, it appears to us that there is nothing in the judgement showing that an unrelated secured financial creditor' is equated with a related financial creditor of the CD. What is observed is clear The NCLT Bench on the other hand equated a related party with that of equity shareholders or partners as provided under section 53(1) (h) of the Code and ranked lower in level than the obligation due to unrelated financial creditors. Non allocation of fund by the resolution

Company Appeal (AT) (Ins.) No. 1272 of 2019 -19-

applicant, in the case, in hand, to the related party of the Corporate Debtor do not contravene the water fall mechanism as provided in Section 53(1)(h) of the Code, 2016. Therefore, we do not find any discrimination in the treatment given to the applicant by the resolution applicant. Accordingly, the objection in that regard also appears to be not sustainable under Law."

(Emphasis supplied)

42. The operating part of the order of Adjudicating Authority emphasised

in bold above clearly shows that the Resolution Applicant has not made any

discrimination in the treatment given to Applicant. The reference to section

waterfall mechanism and reference to Section 53 (1) (h) of the IBC appears

to be a typographical mistake and it should have been 53(1)(d). This would

be further clear from the relevant portions of the resolution plan, (in para 25

herein-above) where the claim of the Appellant was admitted as Unsecured

financial creditor and the same plan was approved by the Adjudicating

Authority.

43. Further The resolution plan in para 7.5 deals with unsecured

financial creditor in the following manner:

7.5. Unsecured financial creditors

7.5.1 Amount- claim filed and admitted under this head is

Rs. 104.69 crores, since the entire amount is relating to claim

made by the related parties, RA proposes to pay NIL amount

under this head".

44. It is clear from the aforesaid discussion that both the CoC and

Adjudicating Authority has treated the appellant as unsecured Financial Company Appeal (AT) (Ins.) No. 1272 of 2019 -20-

Creditor. There are two entries in the category of unsecured financial

creditors, in the resolution plan, one being West Coast Papers and second

one is Gloster cables Ltd. In both these cases full amount of claim filed by

them has been admitted by the RP. They were admitted as part of CoC. Later

on, after their being identified as related parties, the RP informed the

concerned parties that they could not attend the CoC meetings henceforth.

The SRA has proposed NIL amount to the claimants under this head on

account of them being related parties. Appellant in its submission has also

accepted that he is a related party unsecured creditor. The resolution plan

reflecting the status of Appellant as related party unsecured financial

creditor has been approved by the CoC and Adjudicating Authority. In view

of position explained above, we are of the view that the appellant has not

been treated as equivalent to equity shareholder and such contention of

Appellant is devoid of any merit.

45. The main contention of the appellant has been that he has been

discriminated against in payment of claims vis-à-vis other financial creditors

and in this regard, he had relied upon the Judgment of this Tribunal

rendered in the case of 'Dr. Periasamy Palani Gounder Vs.

Mr. Radhakrishnan Dharmarajan, 2022 SCC OnLine NCLAT 86'. The

appellant now claims that since he as a related party financial creditor has

been equated with equity shareholders in the aforesaid judgement of the

Adjudicating Authority, the same is in teeth of judgment passed in the case

of M.K. Rajagopalan (supra). The appellant relies on para 201 & 202 of the

Judgment, the extract of which is given below:

Company Appeal (AT) (Ins.) No. 1272 of 2019 -21-

"201. However, thereafter the Appellate Tribunal proceeded to observe that related party was required to be equated with the promoters as equity share-holders and then, further made certain observations about discrimination between related party unsecured financial creditor and other unsecured financial creditors as also between related party operational creditor and other operational creditors. Such far-stretched observations of the Appellate Tribunal are difficult to be reconciled with the operation of the statutory provisions.

202. It has rightly been argued on behalf of the appellants and had rightly been observed by the Adjudicating Authority (vide extraction in paragraph 15.4.1 hereinabove) that there was no provision in the Code which mandates that the related party should be paid in parity with the unrelated party. So long as the provisions of Code and CIRP Regulations are met, any proposition of differential payment to different class of creditors in the resolution plan is, ultimately, subject to the commercial wisdom of CoC and no fault can be attached to the resolution plan merely for not making the provisions for related party."

46. We would examine this contention of appellant in the light of

judgment of Hon'ble Supreme Court in the M.K. Rajagopalan (supra). The

relevant points of determination relevant to this case is given in para 155 (E)

of the Judgment. The relevant discussion and decision in this regard is

given in paras 198 to 203 of the Judgment;

Point E- the matter concerning related party

198. Another factor taken into consideration by the Appellate Tribunal has been in relation to the so-called discrimination in the resolution plan in relation to a related party of the corporate debtor.

199. Learned counsel for the appellant in Civil Appeal No.1827 of 2022 has referred to several decided cases to

Company Appeal (AT) (Ins.) No. 1272 of 2019 -22-

submit that therein, even when certain dues of related parties were admitted, the resolution plans not providing for any payment to such related parties were upheld by this Court; and that the principles of non-discrimination would not be applicable to the decision of CoC. It has been argued on behalf of the resolution professional that none of the statutory requirements are of any mandate that a provision has to be made in the resolution plan for payment to the related parties. According to the learned counsel, the need is, essentially, to ensure that the plan provides for payment to financial creditors (including dissenting financial creditors) entitled to vote. Thus, the plan in question cannot be said to be standing in contravention of any mandatory requirements. Per contra, the learned counsel appearing for the related party would submit that even when related party is to be treated as a separate class in terms of the principles laid down by this Court in Phoenix ARC (supra), so as to be excluded from CoC, there is no reason that they be treated as separate class when it comes to payment of dues under the resolution plan. It is submitted that failure to provide for discharge of debt of the related party is in violation of Section 30(2)(b), (e) and (f) of the Code. The submissions made on behalf of the related party and the observations of the Appellate Tribunal are difficult to be accepted.

200. The lengthy discussion of Appellate Tribunal in regard to the related party (the parts whereof have been reproduced in paragraph 19.7 hereinabove) depict rather unsure and irreconcilable observations of the Appellate Tribunal.

201. After taking note of the fact that related party is prohibited to be a part of CoC and is further prohibited to be a resolution applicant or an authorized representative etc., the Appellate Tribunal has rightly observed that involvement of a related party in CIRP in any capacity was seen as giving unfair benefit to the corporate debtor; and that the statutory recognition of related party as a different class would apply even to resolution plan when CoC would decide whether in

Company Appeal (AT) (Ins.) No. 1272 of 2019 -23-

its commercial wisdom it should pay to related party at all because that would mean paying to the same persons who are behind the corporate debtor. However, thereafter the Appellate Tribunal proceeded to observe that related party was required to be equated with the promoters as equity share-holders and then, further made certain observations about discrimination between related party unsecured financial creditor and other unsecured financial creditors as also between related party operational creditor and other operational creditors. Such far-stretched observations of the Appellate Tribunal are difficult to be reconciled with the operation of the statutory provisions.

202. It has rightly been argued on behalf of the appellants and had rightly been observed by the Adjudicating Authority (vide extraction in paragraph 15.4.1 hereinabove) that there was no provision in the Code which mandates that the related party should be paid in parity with the unrelated party. So long as the provisions of Code and CIRP Regulations are met, any proposition of differential payment to different class of creditors in the resolution plan is, ultimately, subject to the commercial wisdom of CoC and no fault can be attached to the resolution plan merely for not making the provisions for related party.

203. On the facts of the present case, we find no reason to discuss this matter any further when it is noticed that the promoter and erstwhile director, the contesting respondent before us, has been holding the position of Chairman of the said related party. Suffice it would be to observe for the present purpose that the Appellate Tribunal has erred in applying the principles of non-discrimination and thereby holding against the resolution plan in question for want of provision for related party.

47. It is seen from the records that the Appellant was aware of the fact,

that it was being treated as a related party and was accordingly removed

Company Appeal (AT) (Ins.) No. 1272 of 2019 -24-

from the Committee of Creditors. The same is evident from emails dated

25.01.2019 and 16.02.2019 sent by the RP to the appellant. However, the

Appellant never challenged its treatment as a related party at any stage of

the insolvency resolution proceedings, despite have complete knowledge of

its status as that of a related party. In this case, the Appellant was held to

be a related party of the Corporate Debtor. This has been admitted by the

Appellant in his submission also.

48. In this case there are two parties including the appellant who are

unsecured financial creditors and both of them were held to be related

parties of the Corporate Debtor. The claims filed by both the related parties

were admitted by the RP and CoC. However, Nil amount has been provided

for both the related parties in the resolution plan approved by the

Adjudicating Authority. The claim of the appellant is that he should be kept

in the same class as other financial creditors and provision be made for him

also in the resolution plan.

49. We have seen that in the instant case, among the financial creditors,

only secured financial creditors (not related to Corporate Debtor) are being

paid Rs. 64.20 crores against their admitted claims of Rs. 619.24 crores.

The appellant who is an unsecured financial creditor and related party to

Corporate Debtor does not fall in that category as per IBC.

50. The Judgment of Hon'ble Supreme Court in M.K. Rajagopalan (supra)

fills the gap in legislation specifically in this aspect of discrimination against

related party of Corporate Debtor. The relevant issue framed by Hon'ble

Supreme Court in paragraph 155 (E) of the Judgment is extracted below:

Company Appeal (AT) (Ins.) No. 1272 of 2019 -25-

"Points for determination

155. For what has been noticed hereinabove and looking to the overall scenario, the following principal points arise for determination in this batch of appeals......

(A) .

.

(E) Whether the Appellate Tribunal has erred in applying the principles of non-discrimination in relation to related party of corporate debtor and thereby holding against the resolution plan in question for want of provision for related party?"

...

51. We find the issue framed squarely covers the present appeal where a

related party creditor has prayed for parity with other financial creditors.

52. Hon'ble Supreme Court has given its findings about the related party

creditor in paras 198 to 203 of the M.K. Rajagopalan (supra). Paras 198 to

201 discuss the issue in hand in detail and para 202 gives the findings of

the Hon'ble Court. The Court has upheld the stand of Adjudicating

Authority that there was no provision of the code, which mandates that the

related party should be paid in parity with unrelated party. Any prohibition

of differential payment to different class of creditors in the resolution plan is

ultimately, subject to the commercial wisdom of CoC and no fault can be

attached to the resolution plan merely for not making provisions for a

related party, so long as provision of the IBC and CIRP regulations are met.

53. The Court observed in Para 203 of the Judgment of M.K. Rajagopalan

(supra) that in the case under reference, promoter and erstwhile director

Company Appeal (AT) (Ins.) No. 1272 of 2019 -26-

who was also a contesting respondent in the matter, was also holding the

post of Chairman of the said related party. It held that the Appellate

Tribunal has erred in applying the principles on non-discrimination between

related and non-related parties and held back the resolution plan.

54. We have seen that the Judgment of M.K. Rajagopalan (supra) squarely

applies to the facts of the present case. The CoC and Adjudicating Authority

were well within their rights not to treat a related party unsecured creditor

on par with secured financial creditors. We, therefore, find no infirmity in

the order of Adjudicating Authority in this regard.

55. Thus, in view of the aforesaid discussion, we do not find any merit in

the present appeal and the same is hereby dismissed. There would be no

order as to costs. Interlocutory Application, if any, are closed.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Mr. Naresh Salecha] Member (Technical)

[Mr. Indevar Pandey] Member (Technical)

sa

Company Appeal (AT) (Ins.) No. 1272 of 2019