IBC does not provide for testing validity of resolution plan disapproved by the CoC: NCLAT

IBC does not provide for testing validity of resolution plan disapproved by the CoC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has ruled 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.

The Appellant – Harkirat Singh Bedi was an Erstwhile promoter of M/s IDEB Projects Private Limited (Corporate Debtor). The Appeal was preferred under section 61 of the Insolvency and Bankruptcy Code (I&B Code) challenging the impugned order passed by the Adjudicating Authority (National Company Law Tribunal, Bengaluru Bench) wherein the order for liquidation of the Corporate Debtor was passed.

The Appellant mainly submitted that the Adjudicating Authority erred in not taking into consideration that the Hon'ble High Court of Karnataka had allowed the Appellant to submit his resolution plan to RP. However, even if COC agreed to allow the Appellant to submit his resolution plan but the Appellant was not given the statutory time period of 30 days to place his resolution plan and the COC abruptly decided not to seek extension of time for CIRP process from the Adjudicating Authority.

On the contrary, the First Respondent(Financial Creditor) submitted that the specific liberty was being given by the Adjudicating Authority to the Appellant that the impugned order shall not preclude Appellant from approaching the High Court of Karnataka in pending Writ Petition by seeking appropriate directions in the matter.

Thus the Appellant ought to have approached the High Court of Karnataka in case Appellant had any grievance and present appeal was thus prematured. The second respondent(Liquidator) stated that that COC applied its commercial wisdom and rejected for extension of time for CIRP.

Referring to section 33 (2) of the I&B Code,the Appellate Tribunal opined that the commercial wisdom of COC shall not be challenged and it shall be the COC who shall decide whether the resolution plan is feasible or not.

COC may at any time but before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum, may take the decision to liquidate the Corporate Debtor.

The contention of the Appellant that he was declared a wilful defaulter by SBI, State Bank of Travancore and Oriental Bank of Commerce without following the guidelines of RBI was outside the jurisdiction of this Tribunal.

The Appellant filed the Writ Petition in the High Court of Karnataka challenging his being declared as a wilful defaulter. The High Court of Karnataka passed an interim order merely allowing the Appellant to submit his resolution plan but no stay of declaration as 'wilful defaulter' was granted.

The Appellate Tribunal affirmed that since, the Writ Petition was still pending before the High Court therefore, the RP cannot go into the correctness or incorrectness of declaration as wilful defaulter and can only rely on the present status of the resolution applicant.

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.

The Appellate Tribunal stated that as per the provisions under section 29A along with section 240A of I&B Code, 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 was declared ineligible under clause (b) of Section 29A where no exemption had 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 was ineligible to take the benefits of section 240A under I&B Code.

The Appellant could not take the plea that he was not given the statutory time period of 30 days to place his resolution plan as he had submitted his resolution plan well within time as agreed in the COC meeting i.e. onor before 16th September, 2019.

The contention of the Appellant that COC abruptly decided not to seek extension of time for CIRP process from the Adjudicating Authority was invalid as it is the commercial wisdom of the COC whether they want to seek extension of time or not after considering the feasibility and viability of the submitted resolution plan.