CoC cannot device an illegal mechanism to circumvent the scheme of the Code: NCLT Mumbai

CoC cannot device an illegal mechanism to circumvent the scheme of the Code: NCLT Mumbai

The National Company Law Tribunal (in short NCLT), Mumbai bench by its division bench Justice P. N. Deshmukh (Judicial Member) and Shyam Babu Gautam (Technical Member) directed that the Administrator shall take the Resolution Process of the Corporate Debtor to its logical conclusion and the CoC in its own wisdom and absolute discretion shall take appropriate decision to complete the Corporate Insolvency Resolution Process, in compliance of the provisions enshrined in the Insolvency and Bankruptcy Code, 2016 (Code) within stipulated period by adopting due process under Regulation 39 of the CIRP Regulations.

The Reserve Bank of India (in short RBI) had applied to initiate Insolvency Resolution Process against the Reliance Group Company at NCLT Mumbai bench.

Reliance Capital Limited (Corporate Debtor) was admitted into Corporate Insolvency Resolution process ("CIRP") vide Order dated 06 December, 2021 and an Administrator was appointed. In November 2022, Torrent Investment Pvt Ltd. (in short Torrent) submitted a final Resolution Plan. Torrent emerged as the top bidder in the auction process with an offer of Rs. 8,640 crore for Reliance Capital and approached the bankruptcy court to restrain lenders from considering Hinduja's upgraded offer of Rs. 9,000 crore, arguing that accepting late offers violated the norms for insolvency resolution process.

The NCLT ordered in favor of Torrent in its plea challenging the lender's decision to hold a second auction for the sale of Reliance Capital in the matter of Reserve bank of India vs. Reliance Capital Ltd.

Torrent Investments (Applicant) had filed an interim application on 9th January, 2023, seeking the Tribunal to quash the lenders' plans to hold a fresh auction for the takeover of Reliance Capital. Torrent Investment was the highest bidder offering Rs. 8,640 crore in the last round of 'challenge mechanism.'

The lenders in the case were planning another auction of Reliance Capital in order to maximize the value of the assets. After the first auction, Torrent Investments was the highest bidder with a bid of Rs 8,640 crore for Reliance Capital

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Following this, the Committee of Creditors (in short CoC) was planning for a second auction after it received an offer from Hinduja group of Rs. 9,000 crore, higher than that of Torrent Investments.

The Applicant contended that the mandate to ascertain whether or not a resolution plan complies with the mandatory requirements of the Code and the CIRP Regulation is that of the Administrator and that the CoC cannot have any involvement in the review of resolution plans before the Administrator could decide whether or not they comply with the Code and the CIRP Regulations. It is only after this determination, and after the Administrator has placed compliant plans before the CoC, that the CoC can review these compliant resolution plans. In the present case, the CoC is attempting to illegally usurp the functions of the Administrator and participate in determining compliance of resolution plans.

On January 25, 2023 lenders of RCap filed an appeal before the National Company Law Appellate Tribunal (in short NCLAT) to challenge the bankruptcy court order for maintaining the status quo on the company's insolvency proceedings.

The lenders argued that the interim stay ordered by NCLT is not maintainable under law. Prior to that, NCLT directed the lenders of Anil Ambani-promoted Reliance Capital to maintain the status quo and requested all applicants to submit written notes.

However, the NCLAT deferred the second auction for RCap, which was scheduled for 19 January to 23 January as the NCLT Mumbai bench could not complete the hearing of arguments of all applicants.

The Tribunal in its 71 pages judgment elaborately discussed various issues. Firstly, whether Regulations 39 (1A) and (1B) of the CIRP regulation were mandatory or directory was considered by the Tribunal. It observed that, treating Regulation 39(1A) and 39(1B) of the CIRP Regulations as directory would defeat the intent behind the introduction of said regulation (i.e., inter alia prevention of unsolicited bids/las-minute revisions to the resolution plans which may delay the CIRP) and ruled that Regulation 39(1A) and Regulation 39(1B) are to be construed as a mandatory and not directory provision.

Secondly, whether any further negotiations could be allowed by the CoC after conclusion of value maximization under Regulation 39(1A), in exercise of its commercial wisdom, by either relying on general provisions of the Request For Resolution Plan (in short RFRP) or modifying /re-issuing the RFRP was taken up by the NCLT?

It was observed that post the introduction of Regulation 39(1A) and (1B), the CIRP Regulations recognized a linear process for negotiation of resolution plans, where the RFRP issued under Regulation 36B could be modified (but not more than once) in terms of Regulation 36B(5) or re-issued (if the plans received in relation to an earlier issue are unsatisfactory) in terms of Regulation 36B(7).

However, once these options are exhausted, the only avenue for value maximization is under Regulation 39(1A) and once an option under Regulation 39(1A) is chosen to negotiate with the RAs or improve value of the received resolution plans, it is presumed that such conclusive negotiations are undertaken by CoC after finding that the results of the CIRP are satisfactory and then there is no need for the re-issuance of the RFRP, remarked the Tribunal.

The NCLT observed that the CoC cannot exercise its commercial wisdom which is ultra vires the procedural framework provided under the Code read with the CIRP Regulations. "We are, thus, of the view that CoC cannot device an illegal mechanism to circumvent the scheme of Code to indirectly be able to negotiate further with the resolution applicants post conclusion of the statutory scheme of challenge process under Regulation 39(1A). The settled legal principle of 'Quando aliquid prohibetur ex directo, prohibetur et per obliquum' dictates that one cannot do indirectly what one cannot do directly. Applying this principle in the present case, consideration of the revised financial proposal of the IIHL (revised after the conclusion of the challenge mechanism), being in gross violation of the challenge mechanism as well as Regulation 39(1A) & 39(1B) of CIRP Regulations, cannot be done indirectly under the garb of declaring the result of the challenge mechanism as sub-optimal and resetting the clock back to Regulation 36B in derogation of the regulatory intent, especially when the final financial proposal of the Applicant was much above the minimum threshold set in the challenge mechanism. The proposed second round of the challenge mechanism is nothing but an act to indirectly achieve what could not have been achieved by adhering to the challenge mechanism in terms of the challenge process note."

The bench opined that along with this right, a responsibility and duty are casted to follow the value maximization process in a regulated manner i.e., in the manner prescribed in Regulation 39(1A) and therefore in the time bound manner, which is a fundamental principle of the IBC along with value maximization.

The tribunal concluded the hearing on Torrent Investments plea seeking quashing of the lender's plan for a new round of 'challenge mechanism' and directed that the administrator will take the resolution process of the corporate debtor to its logical conclusion and the CoC in its own wisdom and absolute discretion shall take appropriate decision to complete the CIRP, in compliance of the provisions of the code within stipulated period.

It held that the challenge mechanism for financial bids with respect to the Corporate Debtor under the challenge Process Note stood concluded with the financial bid of the applicant at INR 8,640 Crores being the highest financial bid as communicated by the respondent by its email dated 21.12.2022. It is hereby declared that issuance of process note for extended challenge mechanism is thus in violation of Regulation 39 (1A) of the CIRP Regulations.