Navayuga Engineering Company Ltd. Vs. Mr. Umesh Garg, RP of Athena Demwe Power Ltd. - Adjudicating Authority would have been well within its powers to reject a Resolution Plan if the disqualification of SRA under Section 29A of IBC, 2016 is brought to/comes to its notice before its approval.

 NCLT New Delhi-II (26.05.2023) In Navayuga Engineering Company Ltd. Vs. Mr. Umesh Garg, RP of Athena Demwe Power Ltd. [CA. NO. 237/ND/2018 IN Company Petition No. (IB)-244(ND)/2017] held that;

• Adjudicating Authority would have been well within its powers to reject a Resolution Plan if the disqualification of SRA under Section 29A of IBC, 2016 is brought to/comes to its notice before its approval. 

• The Section 29A(c) of IBC, 2016 has three essential conditions that viz, 

• (a) the account of the Corporate Debtor must be NPA, 

• (b) such account must be under the management or control of such persons (Resolution Applicant) or of whom such person is a Promoter, and 

• (c) at least a period of one year has elapsed from the date of such classification till the date of commencement of CIR process of the Corporate Debtor. 

Excerpts of the order; 

VI. Discussion and Observations

# 15. We have heard the Ld. Counsels for the Applicant, RP, and CoC in detail and perused the documents placed on records including their Written Submissions and Convenience compilations.

# 16. From the records, it is observed that RP/CoC has considered the Applicant/NECL as ineligible under Section 29A of IBC 2016 and held that the Resolution plan submitted by the Applicant/NECL falls within the purview of Section 29A(c) of IBC,2016 mainly on the following grounds that the: 

• (i) Applicant/NECL is the Promoter of the ADPL/Corporate Debtor.

• (ii) Applicant/NECL is a promoter of another Corporate Debtor namely, East Coast Energy Pvt. Ltd, whose account has been declared as NPA.

# 17. The Applicant/NECL submitted that the decision to consider them ineligible under Section 29A of IBC, 2016, and treat them as falling within the purview of Section 29A(c) was communicated by the RP vide e-mail dated 22.06.2018 (hereinafter referred to as the “disqualification e-mail”). When we peruse the said e-mail, we find that the disqualification was not done or communicated on the ground of any connection of the Applicant with M/s East Cost Energy Pvt. Ltd. However, during the course of the hearing, Ld. Counsel appearing for the Applicant submitted that this additional ground, to disqualify the Applicant/NECL has been resorted to subsequent to the issuance of the abovementioned disqualification e-mail communication. This act was not disputed by the Ld. Counsels appearing for the RP and CoC. In  our considered view, the ground which was neither considered by CoC in its meeting nor recorded in its minutes nor communicated by RP to the Applicant to disqualify the Applicant, cannot be relied upon at this belated stage. Hence, this Adjudicating Authority will limit its adjudication to the grounds, based on which disqualification of the Applicant/NECL was arrived at and communicated vide e-mail dated 22.06.2018.

# 18. Accordingly, the issue, which emerges for our consideration and Adjudication is “Whether the Applicant / Navayuga Engineering Company Limited (NECL), was a ‘promoter’ of the Corporate Debtor/ Athena Demwe Power Ltd (ADPL).”

# 19. For this purpose, when we refer to the word ‘promoter’, we observe that the same is not defined under IBC, 2016. Therefore, in line with the provisions under Section 3(37) of IBC 2016, we have to rely upon the definition provided under Section 2(69) of the Companies Act, 2013, which reads thus:

• # 2(69) - promoter; means a person -

• (a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

• (b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

• (c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:

• Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;

On perusal of Section 2(69)(b) of the Companies Act, 2013, we observe that the adjective “control” has been used. The definition of “control” is given under Section 2(27) of the Companies Act, 2013, which reads thus:

• #2(27) - control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner;

# 20. Thus, we find that the definition of “control” is quite inclusive and non-exhaustive in nature. Therefore, we would like to examine whether the Applicant/NECL was having control over the affairs of the ADPL/Corporate Debtor in terms of this definition.

# 26. On perusal of the above clauses, it is observed that the “Effective Date” of the MOU was the date on which it was executed by and between the parties i.e., 23.03.2016. This date is also evident from the date of the Stamp Paper, annexed with the said MOU.

# 27. We also observe that there are no timelines stipulated in the MOU with respect to the Receipt of regulatory approvals, Execution of definitive Shareholders’ Agreements, etc. Further, Clause 4.5 of the MOU mentions that “…Till the financial closure of the project is achieved or Definitive Agreements executed, the internal management of the Company would be run on the basis of the provisions of this MOU.” Moreover, even if the MOU was subject to regulatory approvals and approvals by senior lenders, which if not received, the Applicant could have followed the procedure to seek termination of the MOU by following the mandate of clause 8.9, which was not followed. Hence, both in effect and practice, clause 4.5 of the MOU remained operational. 

# 28. Furthermore, we observe that by virtue of Clause 3.2 (reproduced in para 24 above), from the Effective Date i.e., 23.03.2016, the Applicant was vested with the right to nominate the majority of the Directors on the reconstituted Board of ADPL/CD, which depicts that the Applicant/NECL was capable of constituting the composition of the Board. 

# 29. Further, as we have noticed from the email communications between the parties (NECL and ADPL), especially the mail dated 10.01.2017, the Applicant was advising the Corporate Debtor on policy-related issues viz., investment, subscription of shares, EPC Contracts, etc, which indicates that the Applicant/NECL was exercising its ‘control’ over the Corporate Debtor/ADPL through policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly in terms of the term ‘Control’ as defined under Section 2(69)(b) of the Companies Act, 2013.

# 32. In view of the Judgement of the Hon’ble Apex Court (Supra), it can be inferred that the amendment in Section 29(A)(c) i.e., “at the time of submission of the resolution plan” was clarificatory in nature. Hence, the trigger point of Section 29A is the date when the Resolution Plan was actually submitted by the Resolution Applicant to the CoC. In view of the above and therefore, the date of transfer of shares by the Applicant/NECL in Regina (RIPL) during the period when Section 29A of IBC, 2016 was not notified, will/does not create an escape route for the Applicant, since the date on which the Resolution plan was actually submitted by the Applicant/NECL to the CoC i.e., on 04.06.2018, the Section 29A of IBC, 2016 was in force. 

# 37. In view of the examination of the aforesaid chain of events and documents placed on record, we observe that the entire transaction of the transfer of shares of Regina (RIPL) by the Applicant/NECL was done in cash, the date of receipt of which cannot be proved beyond doubt (in the absence of any digital record), especially when both the transferor and transferee of shares are known and connected. Further, as noted earlier, when the Applicant/NECL had given a loan of Rs. 328 Crores to Regina (RIPL), the transfer of its shares by the Applicant/NECL at a nominal amount of Rs. 1,00,000/- (One Lakh) only, that too only 6 days prior to the date of commencement of the CIR Process of the Corporate Debtor/ADPL, raises serious doubts about the fairness of the connected-party transaction. In the circumstances, there exist sufficient grounds for agreeing with the contention of CoC/RP that the transaction was a sham.  

# 38. However, it is still contended by the Applicant/NECL that there is nothing illegal in the transaction and there is no law, which prohibits such a transaction even if it was done in cash. Further, it was argued as to what price, the shares should be sold is the prerogative of the Transferor and Transferee of shares and the RP has no jurisdiction to raise any objections towards it. In view of such a contention raised by the Applicant that the transactions of shares of the Applicant/NECL in Regina (RIPL) were genuine and legal, which for the time being if we assume so, a question arises, whether Regina (RIPL) can still be considered under the “control” of the Applicant/NECL

# 41. At this stage, at the cost of repetition, we again refer to the definition of ‘Control’ as defined under Section 2(69)(b) of the Companies Act, 2013, which reads thus: 

• #2(27) - control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner;

We observe that the definition of “Control” is an inclusive and non exhaustive one that, inter alia, includes the following - 

• a) right to appoint a majority of directors, or 

• b) to control the management, or 

• c) policy decision exercisable by a person or persons acting individually or in concert, directly or indirectly 

• d) including by virtue of their shareholding or management rights or shareholders agreement or voting agreements or in any other manner.

# 42. Therefore, in terms of Section 2(69)(b) of the Companies Act 2013, besides shareholding, there are other ways of exercising ‘control’ over a company/entity. As observed earlier, the RP has alleged that Mr. K. Vijayabhaskar, to whom 50% of the shares of Regina (RIPL) were transferred, was an official acting on behalf of the Applicant/NECL and to substantiate this fact, he had referred to Mr. K. Vijayabhaskar’s email id mentioned in the share transfer deed. Accordingly, at this stage, we would like to examine Whether there was any direct or indirect connection between Mr. K. Vijayabhaskar and other Directors of Regina (RIPL) with the Applicant/Navayuga/NECL or its Related/Connected Entities.

# 49. Thus, it is observed that even though the Applicant/Navayuga/NECL sold its 100% shareholding in Regina (RIPL) and even if we assume that the said sale was genuine and legal, we find that the Directors of the Connected/Related Companies to the Navayuga (NECL)/Applicant still continued/are continuing in the Board of Regina (RIPL). Thus, on the lifting of the Corporate Veil, we have no doubt in our mind that the Applicant/Navayuga (NECL) was indeed exercising control over Regina (RIPL) through the Directors of its Related/Connected Companies. 

# 50. Thus, we have examined the transaction of shares in Regina (RIPL) from both angles. Not only, we did not find any reason to differ with the contention of RP/CoC that the transaction was a sham, but also even for the sake of argument, while assuming the transaction to be genuine, we found that the Applicant/NECL was exercising control over Regina (RIPL) through the Directors of its Related/Connected Companies. Hence, we find no merit in the contention raised by the Applicant/NECL that after the sale of its shareholding, it was not in a position to control Regina (RIPL) hence, it cannot be said to be in control of the ADPL/Corporate Debtor

VII. Procedural Impropriety

# 51. It is further submitted by the Applicant/NECL that it is post submission of EOI, the RP vide its following email dated 02.05.2018 communicated that prima facie, the Applicant herein was eligible to submit the Resolution Plan. In the normal course, it was the duty of the RP to verify the eligibility of the Resolution Applicants immediately on/after receipt of EOIs only. It was not apt for the RP to wait till the submission of the Resolution Plan and then, consider and decide the eligibility of the Resolution Applicants under Section 29A of IBC 2016. Even if we assume this as a lapse, the fact that the Applicant/NECL was disqualified under Section 29A would not have changed and the outcome still would have remained the same. Furthermore, in our considered view, even if the fact of disqualification of the Applicant/NECL under Section 29A of IBC 2016 had come to the notice of RP/CoC subsequent to the opening of the Resolution Plan, RP/CoC are duty bound to take cognizance of such a fact prior to approval of Resolution Plan and act as per the provisions of the IBC 2016. Certainly, the procedure(s) cannot take precedence or override the legal infirmity, even if the same is noticed subsequently. Even for that matter, post-approval of a Resolution Plan by the CoC, this Adjudicating Authority would have been well within its powers to reject a Resolution Plan if the disqualification of SRA under Section 29A of IBC, 2016 is brought to/comes to its notice before its approval. 

# 53. Thus, we find that the Corporate Debtor was NPA since 31.05.2013 and continuing so on the date of filing of the Resolution Plan by the Applicant/NECL, which is one of the criteria laid down for disqualification under Section 29A(c) of IBC 2016.

IX. Conclusion 

# 54. As per the Judgement of the Hon’ble Apex Court in ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1, the amendment in Section 29(A)(c) i.e., “at the time of submission of the resolution plan” was clarificatory in nature. Hence, the trigger point of Section 29A is the date when the Resolution Plan was actually submitted by the Resolution Applicant to the CoC. In the instant case, the Resolution plan was submitted by the Applicant/NECL to the CoC on 04.06.2018, when Section 29A of IBC, 2016 was already in force. 

# 55. In the sequel of the discussion and observations in Part VI of this order, we conclude that the Applicant herein/NECL was a ‘promoter’ exercising its ‘control’ over the Corporate Debtor/ADPL in view of the following findings – 

• (i) Clause 4.5 of the MOU dated 23.03.2016 i.e.,“…Till the financial closure of the project is achieved or Definitive Agreements executed, the internal management of the Company would be run on the basis of the provisions of this MOU” remained operational both in effect and practice. Further, even if the MOU was subject to regulatory approvals and approvals by senior lenders, which if not received, the Applicant did not get the MOU terminated in terms of clause 8.9. 

• (ii) By virtue of Clause 3.2 of the said MOU, from the Effective Date i.e., 23.03.2016, the Applicant was vested with the right to nominate the majority of the Directors on the reconstituted Board of ADPL/CD, which depicts that the Applicant/NECL was capable of constituting the composition of the Board. 

• (iii) The Applicant/NECL was exercising its ‘control’ over the Corporate Debtor/ADPL through the exchange of variouscommunications/policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly in terms of the term ‘Control’ as defined under Section 2(69)(b) of the Companies Act, 2013. 

• (iv) The entire transaction of the transfer of shares of Regina (RIPL) by the Applicant/NECL was done in cash, the date of receipt of which cannot be proved beyond doubt in the absence of any digital record, especially when both the transferor and transferee of shares are known and connected to each other. Further, while the Applicant/NECL had given a loan of Rs. 328 Crores to Regina (RIPL), the act of transferring its shares including to one of the Directors of Regina at a nominal amount of Rs. 1,00,000/- (One Lakh), that too only 6 days prior to the date of commencement of the CIR Process of the Corporate Debtor/ADPL, raises serious doubts about the fairness of the transaction. In the circumstances, there exists sufficient ground for agreeing with the contention of CoC/RP that the transaction was a sham. 

• (v) Even otherwise, on lifting the Corporate Veil of Regina (RIPL), we found that the Applicant/Navayuga (NECL) was exercising control over Regina (RIPL) through the “Directors of its Related/Connected Companies” even on the date of submission of the Resolution Plan. 

# 56. We have also noted, in paragraph 53 above, from the documents placed on record that the Corporate Debtor was NPA since 31.05.2013. 

# 57. The Section 29A(c) of IBC, 2016 has three essential conditions that viz, 

• (a) the account of the Corporate Debtor must be NPA, 

• (b) such account must be under the management or control of such persons (Resolution Applicant) or of whom such person is a Promoter, and 

• (c) at least a period of one year has elapsed from the date of such classification till the date of commencement of CIR process of the Corporate Debtor. 

# 58. In the instant case, we have found that all the three ingredients of the Section 29A(c) are met i.e., (a) the account of the Corporate Debtor/ADPL was NPA since 31.05.2013, (b) a period of more than 4 years has lapsed from the date of NPA till the commencement of CIRP of the Corporate Debtor on 28.09.2017, and (c) the Applicant herein/NECL has been found to be a ‘promoter’ exercising its ‘control’ over the Corporate Debtor/ADPL through Regina (RIPL). 

# 59. In view of the above, we find no error committed by the RP/CoC in holding the Applicant/NECL as ineligible in terms of Section 29A(c) of IBC, 2016 to submit the Resolution Plan. Hence, all the prayers made in the present application stand rejected. 60. 

The Application is accordingly, Dismissed.

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Martin S.K.Golla & Anr. Vs Wig Associates Pvt. Ltd. & Ors. - Disqualification pursuant to section 29-A(c) shall be applicable at the time of submission of the resolution plan to the RP.

 NCLAT (04.06.2021) in Martin S.K.Golla & Anr. Vs  Wig Associates Pvt. Ltd. & Ors. [Company Appeal (AT) (Ins) No.121 of 2019] held that; 

•  The opening words of Section 29A state: “a person shall not be eligible to submit a resolution plan…”. It is clear therefore that the stage of ineligibility attaches when the resolution plan is submitted by a resolution applicant.

• Further, the expression used is “has”, which as Dr.Singhvi has correctly argued, is in praesenti. This is to be contrasted with the expression “has been”, which is used in sub- clauses (d) and (g), which refers to an anterior point of time.

• that the disqualification pursuant to section 29-A(c) shall be applicable if such NPA accounts are held by the resolution applicant or its connected persons at the time of submission of the resolution plan to the RP.”

 

Excerpts of the order;

# 1. The Appellant is Resolution Professional who has filed this Appeal claiming that the same is filed in view of the Order dated 1st August, 2018 and Order dated 11th January, 2019 passed by this Tribunal in Company Appeal (AT) (Ins) No.415 of 2018 vide which Order, this Tribunal directed e-filing of the Appeal to clarify correct position of law.

# 2. The Appellant claims that he was Resolution Professional of “Wig Associates Pvt. Ltd.” – Corporate Debtor. The Adjudicating Authority (National Company Law Tribunal, Mumbai Bench, Mumbai) had admitted CP 1214/IBC/NCLT/MB/MAH/2017 under Section 10 of Insolvency and Bankruptcy Code, 2016 (IBC – in short), on 24th August, 2017. The Resolution Plan submitted by Mr. Mahendra Wig was approved by Committee of Creditors (COC - in short) on 20.04.2018 and was placed before the Adjudicating Authority for approval. The Adjudicating Authority approved the Resolution Plan vide Impugned Order dated 4th June, 2018 (Annexure - 1A – Page 39). The present Appeal is with regard to such Impugned Order.

# 4. It is stated that the earlier Appeal was filed by IBBI against the Impugned Order dated 4th June, 2018 when this Tribunal passed Orders dated 1st August, 2018 holding that the IBBI does not have locus to file the Appeal and directed IBBI to ask the Resolution Professional to file the Appeal. This Appeal has been filed claiming that the question of law is as to whether Section 29A of IBC will be applicable with retrospective effect in Section 10 proceedings which were initiated prior to Section 29A coming into force and to decide the issue and any other question of law. 5. We have heard the parties to the Appeal. Before referring to the submissions, a brief background needs to be kept in view. It appears from the record that CP 1214/IBC/NCLT/MB/MAH/2017 was filed on 19th July, 2017 by the Corporate Debtor – M/s. Wig Associates Pvt. Ltd. under Section 10 of IBC against itself as there was debt of Rs.4,85,14,000 of Bank of Baroda. The Petition was admitted on 24th August, 2017. After the CIRP started, there was a COC comprising only of one Financial Creditor, that is, Bank of Baroda. It appears that the sole Financial Creditor in third COC meeting held on 6th April, 2018 informed the Resolution Professional that it had sanctioned “One Time Settlement Offer” issued by Mr. Mahendra Wig. The Bank asked the Resolution Professional the option of treating One Time Settlement Offer as Resolution Plan. The Resolution Professional had obtained Valuation Report stating average liquidation value as Rs.87.60 Lakhs. The sole Financial Creditor had to recover Rs.1067.39 Lakhs. The Resolution Professional, it appears, placed such Resolution Plan before COC on 20th April, 2018 and the Resolution Plan was approved. With the approval of such Resolution Plan, it was placed before the Adjudicating Authority which approved the same. The Order of the Adjudicating Authority shows that there were some Operational Creditors also which included sales tax and income tax authorities. 

# 6. The Impugned Order shows that Adjudicating Authority was aware of the Ordinance enacted by the Central Government on 23rd November, 2017 “The Insolvency and Bankruptcy Code (Amendment) Ordinance 2017 No.7 of 2017” (Ordinance – in short). The Ordinance inserted Section 29A of IBC laying down law with regard to persons not eligible to be Resolution Applicants. The Ordinance later on took shape of Amendment in 2018 when “The Insolvency and Bankruptcy Code (Amendment) Act, 2017 No.8 of 2018” (Amendment – in short) was passed. The Adjudicating Authority was aware that the amendment provided that the amended Act shall be deemed to have come into force on 23rd November, 2017 (the date of the Ordinance). Impugned Order shows that in spite of being aware of such Ordinance and Amendment, the Adjudicating Authority went into an exercise of interpreting this Section and went on to observe that Creditors/Stakeholders must be aware of the Rules at the commencement of the game/proceedings. It observed that “CIRP is a process and can be said to be that the process is nothing but continuous of one proceeding, which commences from the date of “Admission” of an Application Order either under Section 7, 9 or 10 and it ends till the Order is passed under Section 31 approving the Resolution Plan or under Section 33 by initiating “Liquidation”.” The Adjudicating Authority recorded opinion that the CIRP had commenced and Resolution Professional had invited expression of interest which resulted into submission of Resolution Plan by the Resolution Applicant and thus, according to Adjudicating Authority “the same is to be dealt with as per the provisions which existed on the date when the petition was “Admitted”.” Adopting such reasonings, although the Adjudicating Authority recorded that as per Section 29A, Mr. Wig would fall in the category of “connected persons” under Section 29A of IBC, still Adjudicating Authority went to examine the Resolution Plan which was basically One Time Settlement and to accept the same. The Impugned Order was passed accordingly.

# 12. Section 29A deals with persons not eligible to be Resolution Applicants. There is no dispute that earlier an Ordinance was issued on 23rd November, 2017 to stop such ineligible persons (as under Section 29A) from becoming Resolution Applicants and subsequently, the Act came to be passed in this regard and 29A of IBC has become part of the Code.

# 13. Annexure - 14 (Page - 240) Minutes of the third COC dated 5th April, 2018, shows Mr. Mahendra Wig and Mr. Puneet Wig as representing Corporate Debtor – Wig Associates. Item 7 of the Minutes shows the Secured Financial Creditor – Bank of Baroda asking the Appellant to explore possibility of treating OTS proposal (which it had already accepted) as Resolution Plan. This was subsequent to the passing of the Ordinance and even the Amendment Act which inserted Section 29A on 18th January, 2018. The Resolution Plan of Mr. Wig who was undisputedly a related party, was accepted on 20.04.2018 in the 4th COC (Annexure - 16 – Page 248). Section 29A hits the eligibility of the persons to submit a Resolution Plan if a person falls in any of the categories as mentioned in the Section. Appellant informed the Meeting that based on the OTS dated 27.03.2018, the Resolution Plan was being put up.

# 14. It is now settled law that ineligibility attaches at the time when the Resolution Plan is submitted by Resolution Applicant. The Respondent No.3 has rightly placed reliance on Judgement in the matter of “Arcelormittal India (P) Ltd. v. Satish Kumar Gupta” (referred supra) and Judgement in the matter of “Swiss Ribbons” (referred supra).

# 15. The Hon’ble Supreme Court in the matter of “Arcelormittal India Private Limited vs. Satish Kumar Gupta and Others- (2019) 2 SCC 1” observed in para 43, as under:

• “43. According to us, it is clear that the opening words of Section 29-A furnish a clue as to the time at which sub-clause (c) is to operate. The opening words of Section 29A state: “a person shall not be eligible to submit a resolution plan…”. It is clear therefore that the stage of ineligibility attaches when the resolution plan is submitted by a resolution applicant. The contrary view expressed by Shri Rohatgi is obviously incorrect, as the date of commencement of the corporate insolvency resolution process is only relevant for the purpose of calculating whether one year has lapsed from the date of classification of a person as a non- performing asset. Further, the expression used is “has”, which as Dr.Singhvi has correctly argued, is in praesenti. This is to be contrasted with the expression “has been”, which is used in sub- clauses (d) and (g), which refers to an anterior point of time. Consequently, the amendment of 2018 introducing the words “at the time of submission of the resolution plan” is clarificatory, as this was always the correct interpretation as to the point of time at which the disqualification in subclause (c) of Section 29-A will attach. In fact, the amendment was made pursuant to the Insolvency Law Committee Report of March, 2018. That report clearly stated:

• “In relation to applicability of section 29-A(c), the Committee also discussed that it must be clarified that the disqualification pursuant to section 29-A(c) shall be applicable if such NPA accounts are held by the resolution applicant or its connected persons at the time of submission of the resolution plan to the RP.”

• XXXXXX

For reasons recorded by the Hon’ble Supreme Court in the above Judgments, the reasons recorded by the Adjudicating Authority to stretch the interpretations so as to hold that once CIRP is commenced, provisions as existing on the day of admission of the Petition would continue to apply even in the face of amendment brought about by way of Section 29A, the reasons cannot be maintained. Even the Respondent No.2 – Bank of Baroda in its arguments (Diary No.25967) accepts that Section 29A of IBC was with effect from 23rd November, 2017 and the Hon’ble Supreme Court in “Swiss Ribbons vs. Union of India” (referred supra) has upheld the insertion of Section 29A with retrospective effect.

# 16. From the above discussion, there is no doubt that at the time when Mr. Wig submitted the One Time Settlement to the Bank, which was converted by Respondent No.2 with the help of Appellant as a Resolution Plan, he could not have done so. The arguments of Respondent No.2 show that it had already approved the OTS of Mr. Wig on 27th March, 2018. It also appears that Mr. Wig had already paid Rs.103 Lakhs to the Bank. This can be seen from the Impugned Order where it has referred to the compliance with Regulation 38 of CIRP Regulations in Para 14.1 of the Impugned Order. Thus, what appears is that the OTS was already approved by the Respondent No.2 Bank, which was the only Financial Creditor and thus the actions taken on 5th April, 2018 in third COC and 20th April, 2018 were only completion of formalities. The subsequent introduction of Section 240A of IBC and subsequent taking of certificate of being MSME will not cure the ineligibility at the time of submitting OTS-cum-Resolution Plan which was not permissible.

# 17. Considering the provisions of law and the fact as appearing from the record, we find that the said Resolution Plan submitted by Mr. Wig could not have been acted upon and the Appellant erred in presenting the same before COC.

# 18. For above reasons, the Impugned Order is required to be set aside. We pass the following Order:-

ORDER

• The Appeal is allowed. The Impugned Order approving Resolution Plan is quashed and set aside. The alleged Resolution Plan submitted by Mr. Mahendra Wig is rejected. 

• The matter is remitted back to the Adjudicating Authority.  The Adjudicating Authority is required to pass Orders of liquidation of the Corporate Debtor under Section 33 of the IBC.

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Harkirat Singh Bedi Vs. The Oriental Bank of Commerce & Anr. - Rejection/Approval of Resolution Plan is commercial decision of CoC & is non-justiciable

 NCLAT (12.01.2021) in  Harkirat Singh Bedi Vs. The Oriental Bank of Commerce & Anr. [Company Appeal (AT) (Ins.) No. 40 of 2020]  held that; 

• From the abovementioned landmark case it can be concluded that a limited judicial review is available in respect of an approved resolution plan. The grounds under Section 30(2) or 61(3) of the IBC are regarding testing the validity of the approved resolution plan by COC and not for approving the resolution plan which has been disapproved by the COC in exercise of its business decision.

• Also, the date of registration of the Corporate Debtor as MSME as on record was 5th June, 2019, i.e. after CIRP admission order dated 29th March, 2019. The application for registration of MSME by the Appellant was without authorization, being subsequent to initiation of CIRP and hence was invalid. Therefore, the Appellant is ineligible to take the benefits of section 240A under I&B Code

Excerpts of the order;

1. The present appeal has been preferred by Mr. Harkirat Singh Bedi (hereinafter referred to as ‘Appellant’). He was an Erstwhile promoter of M/s IDEB Projects Private Limited (hereinafter referred to as ‘Corporate Debtor’). The Appeal is preferred under section 61 of the Insolvency and Bankruptcy Code (hereinafter referred to as ‘I&B Code’) challenging the impugned order dated 8th November, 2019 passed by National Company Law Tribunal, Bangaluru Bench (hereinafter referred as ‘Adjudicating Authority’) in Company Petition No. C.P. (IB) No. 17/BB/2019. In the impugned order Adjudicating Authority have passed the order for liquidation of the Corporate Debtor.

2. The Adjudicating Authority while passing the impugned order dated 8th November, 2019 observed in para 7 and as follows:

• “….In this regard, it is to be mentioned here that the Resolution Plan submitted by Mr. H.S Bedi is dated 16.09.2019, whereas Section 29A of the code was inserted by Insolvency and Bankruptcy Code (Amendment) Act, 2018 w.e.f. 23.11.2017, whereas it is inter-alia declared that a person shall not be eligible to submit a resolution plan, if such person acting jointly or in concert with such person is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under Banking Regulation Act, 1949.

• Therefore, Section 29A will be applicable to the instant case and thus the rejection of the Resolution Plan of Mr. H.S. Bedi by the COC is not in contravention of the provisions of the Code. However, this order will not preclude Mr. H.S. Bedi to approach the Hon’ble High Court of Karnataka in pending Writ Petition, by seeking appropriate directions in this matter.”

Consequently, admitted the application and ordered the liquidation of the Corporate Debtor by appointing Shri Velayudham Jayavel as Liquidator and issued other consequential directions.

6. Thereafter, COC upon perusal of the said order, unanimously agreed to allow the Appellant to submit his resolution plan. After deliberating and discussing the resolution plan, the COC in its meeting rejected the resolution plan of the Appellant on the following grounds:

• a) The Appellant is declared as a willful defaulter by SBI, State Bank of Travancore and Oriental bank of Commerce and the same is visible in CIBIL database.

• b) The resolution plan was not in compliance with the IBC.

• c) The Appellant did not file affidavit under regulation 39 of the code regarding eligibility of the Appellant under section 29A of the IBC.

• d) Further, the Appellant had also failed to provide undertaking under regulation 38 of the IBC for payment to Operational Creditors.

• e) Appellant also failed to provide undertaking that all the information which Appellant had provided with his resolution plan are true and accurate.

7. In view of the above, the COC decided to liquidate the Corporate Debtor as per the provisions of Section 33(2) of the IBC, with 92.63% of the COC members voting in favor of the same and thereafter, the CIRP period expired on 25th September, 2019. Thereafter, the Adjudicating Authority vide its order dated 8th November, 2019 confirmed the Corporate Debtor is to be liquidated in terms of the liquidation process given under I&B Code and further appointed Respondent No. 2 as liquidator of the Corporate Debtor.

25. The learned counsel for Respondent No. 2 submitted that EOI in Form G was published by RP on 16th June, 2019, in pursuance of which, the Appellant submitted its EOI on 28th June, 2019 claiming exemption of section 29A (c) & (h) read with section 240A declaring that the Corporate Debtor is a registered MSME. Appellant’s EOI was rejected by RP on 26th July, 2019 on the ground that the Appellant had been declared as ‘willful defaulter’ and his name appears as such on the CIBIL’s database. Hence, he was not eligible to be a resolution applicant as per section 29A(b) of I&B Code. It was also informed that the registration of the Corporate Debtor as MSME was obtained by the Appellant on 5th June, 2019, i.e. after CIRP admission order dated 29th March, 2019. The application for registration of MSME by the Appellant was without authorization, being subsequent to initiation of CIRP and hence was invalid. The Appellant had no authority to act on behalf of the Corporate Debtor after the initiation of CIRP, as the management & affairs of the Corporate Debtor are in the hands of the appointed IRP/RP (Innoventive Industries vs. ICICI Bank, (2018) 1 SCC 407, para 10-11). Further, even if the Corporate Debtor was validly registered as an “MSME”, the exemption under section 240A would not be applicable to the present case as, pursuant to section 240A, resolution applicants are exempt only from the provisions of section 29A(c) and 29A(h).

28. The learned counsel for the Respondent No. 2 also contended that the present appeal is not maintainable on the ground that the legislature has not provided any ground for the resolution applicant to challenge the “commercial wisdom” of the COC in rejecting a resolution plan. Under section 31 of the I&B Code, the Adjudicating Authority can only examine an ‘approved’ resolution plan on limited parameters, and not a ‘rejected’ resolution plan is not amicable to challenge before the Adjudicating Authority or before this Appellate Tribunal. The commercial wisdom of the COC in accepting or rejecting a resolution plan is “non-justiciable”. (K. Sashidhar v. Indian Overseas bank & Ors., (2019) 12 SCC 150 para 52, 55, 56). Reliance Emphasized.

29. The learned counsel for the Respondent No. 2 further contended that COC applied its commercial wisdom and rejected for extension of time for CIRP. In the present case, the COC having declined to extend the statutory period, the only consequence is that the Corporate Debtor must go into liquidation, as provided by the impugned order.

32. The learned counsel for the Respondent No. 3 has put his reliance on the leading case of Chitra Sharma v. Union of India, (2018) 18 SCC 575. The extract of the case is reproduced as below: 

• “38. Parliament has introduced Section 29 A into the IBC with a specific purpose. The provisions of Section 29 A are intended to ensure that among others, persons responsible for insolvency of the corporate debtor do not participate in the resolution process….” 

• “39. ......the Court must bear in mind that Section 29 A has been enacted in the larger public interest and to facilitate effective corporate governance. Parliament rectified a loophole in the Act which allowed a back-door entry to erstwhile managements in the CIRP. Section 30 of the IBC, as amended, also clarifies that a resolution plan of a person who is ineligible under Section 29 A will not be considered by the COC……”

34. At this point, this tribunal worth recalls and recollects the decision of Hon’ble Supreme Court in the case of K. Sashidhar v. Indian Overseas Bank & Ors, Civil Appeal No. 10673 of 2018 wherein it is observed as under:

• “33. As aforesaid, upon receipt of a “rejected” resolution plan the adjudicating authority (NCLT) is not expected to do anything more; but is obligated to initiate liquidation process under Section 33(1) of the I&B Code. The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC muchless to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. From the legislative history and the background in which the I&B Code has been enacted, it is noticed that a completely new approach has been adopted for speeding up the recovery of the debt due from the defaulting companies. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory. In the earlier regime, the corporate debtor could indefinitely continue to enjoy the protection given under Section 22 of Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. Besides, the commercial wisdom of the CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I&B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject matter expressed by them after due deliberations in the CoC meetings through voting, as per voting shares, is a collective business decision. The legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority. That is made nonjusticiable.”

35. From the abovementioned landmark case it can be concluded that a limited judicial review is available in respect of an approved resolution plan. The grounds under Section 30(2) or 61(3) of the IBC are regarding testing the validity of the approved resolution plan by COC and not for approving the resolution plan which has been disapproved by the COC in exercise of its business decision.

39. The appellant in its EOI claimed the advantage of section 240A of the code claiming exemptions from applicability of section 29A(c) and 29A(h) in terms of eligibility to be a resolution applicant as a medium level enterprise under MSME Development Act, 2006. On reading the provisions under section 29A along with section 240A of I&B Code. It can be concluded that the exemption is only in respect of clause (c) and (h) of Section 29A of the I&B Code. However, in this case the Appellant is declared ineligible under clause (b) of Section 29A where no exemption has been given to MSME. Also, the date of registration of the Corporate Debtor as MSME as on record was 5th June, 2019, i.e. after CIRP admission order dated 29th March, 2019. The application for registration of MSME by the Appellant was without authorization, being subsequent to initiation of CIRP and hence was invalid. Therefore, the Appellant is ineligible to take the benefits of section 240A under I&B Code.

41. In view of the foregoing discussions this Tribunal finds no legal infirmity in the Impugned Order of the Adjudicating Authority. Appeal is therefore dismissed for the reason accredited by this tribunal. There shall no order as to costs.

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