Supreme Court: Disapproval of Resolution Plan by NCLAT Calls for No Interference

Supreme Court: Disapproval of Resolution Plan by NCLAT Calls for No Interference

The Supreme Court Bench of Justices Dinesh Maheshwari and Vikram Nath has upheld an order passed by the National Company Law Appellate Tribunal (NCLAT), verdict which set aside the approval given to Mr. MK Rajagopalan, Managing Director of MGM Healthcare, to make an Rs. 423 crores bid to take over Appu Hotels Ltd., which owns and operates Le Meredian in Coimbatore and Chennai.

The background of the case was that, in 2020, the National Company Law Tribunal (NCLT) Chennai had admitted an insolvency petition against Appu Hotels in a case filed by the Tourism Finance Corporation of India Ltd. Thereafter, it approved Mr. Rajagopalan’s bid to take over Appu Hotels. Based on an appeal filed by Periasamy Palani Gounder (promoter and erstwhile director) of Appu Hotels Ltd, NCLAT had set aside the approval given for the plan.

Aggrieved by the same, Mr. Rajagopalan preferred an appeal before the Apex Court against the order of the NCLAT. A number of other petitions were also filed regarding the same.

The Apex Court was of the view that the resolution plan in question could not have been approved by the adjudicating authority (NCLT) for two major reasons — first, due to the ineligibility of the resolution applicant and second for not placing the revised resolution plan in the Committee of Creditors (CoC) before seeking approval from the adjudicating authority.

The Apex Court with respect to Valuation of Regulation 27 and 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (for short CIRP Regulations) remarked that the Appellate Tribunal had unnecessarily and rather unjustifiably presumed that there had been blatant statutory violations and irregularities. Even if certain issues were raised in some of the meetings of CoC as regards the process of valuation, the clarifications from the resolution professional and the steps taken by him for valuation and revaluation had been to the satisfaction of CoC. The Court opined that resolution plan is not required to match the liquidation value as such.

The Court disagreed with the argument advanced by the contesting parties as regards impact of Section 164(2)(b) of the Companies Act because of the alleged default of the company named International Aviation Academy Private Limited of which, the resolution applicant was a director. It was argued that the said company collected share application money pending allotment and did not refund the same; and consequently, in terms of Section 164(2)(b) of the Companies Act, this default disqualified the resolution applicant from acting as a director and thereby, would render him ineligible to submit a resolution plan.

The Court observed, “Even if there had been any possibility of the resolution applicant incurring such a disqualification in terms of Section 164(2)(b) of the Companies Act, because of alleged default of another company, in which he is a director, to refund the share application money, the same would essentially be a matter of consideration of the registrar of companies regards any such default and unless specific order disqualifying the resolution applicant as director because of such default came into existence, it could not have been taken by way of any process of assumption that the appellant-resolution applicant was disqualified to act as a director and thereby, was ineligible to submit a resolution plan.”

Hence, the bench was of the view that the Appellate Tribunal was not right in holding the resolution applicant ineligible by virtue of Section 164(2)(b) of the Companies Act.

The bench while noting that two Invitation for Expression of Interest’s (EOIs) were filed by the resolution applicant, one for himself and another one on behalf of the ineligible trust. The Court concurred with the Appellate Tribunal’s view that the applicant-Mr. M.K. Rajagopalan, being the Managing Trustee of the said trust, could not be permitted to act as its alter ego in implementing the resolution plan to gain financial advantage for himself.

By virtue of the operation and impact of Section 88 of the Trusts Act, submission of individual resolution plan by the appellant cannot be countenanced for any implementation of the said individual resolution plan would nevertheless be hit by the provisions contained in the Trusts Act, the bench observed.

Apropos to the issue of revision of resolution plan after approval by CoC, the Court avowed, “the commercial wisdom of CoC means a considered decision taken by CoC with reference to the commercial interests and the interest of revival of the corporate debtor and maximization of value of its assets. This wisdom is not a matter of rhetoric but is denoting a well-considered decision by the protagonist of CIRP i.e., CoC.”

Averting to the present case, the bench while noting the submissions made, remarked that at the first blush it appeared as if revision of the plan after ninth CoC meeting had been a matter of formality and consequential to the approval already given by the CoC. However, while closely looking at the scheme of Insolvency and Bankruptcy Code, 2016 (for short- IBC), this irregularity of not placing the revised plan after ninth meeting before the CoC and directly placing it before Adjudicating Authority could not be ignored as a mere technicality, regarded the bench.

The bench expressed, “when commercial wisdom of CoC is assigned primacy, it presupposes a considered decision on the resolution plan in its final form. For what has been discussed hereinabove, disapproval of the resolution plan by the Appellate Tribunal for want of presentation of final resolution plan before CoC remains unexceptionable and calls for no interference.”

Notably, the Court set aside the NCLAT's observations made in the context of the treatment of the related party in the resolution plan and the settlement offer of the promoter. Subsequently, the question of dealing with the fresh settlement proposal of the promoter was left open for the consideration of the Adjudicating Authority.

While concluding, the bench held, “we are clearly of the view that even while respecting the commercial wisdom of CoC, in the present case, the resolution plan in question could not have been approved by the Adjudicating Authority for two major reasons: one, for the ineligibility of the resolution applicant; and second, for not placing of the revised resolution plan in the CoC before seeking approval from the Adjudicating Authority.”

Considering the same, the Court held that the impugned order would not be interfered with only insofar as the Appellate Tribunal has not approved the resolution plan in question. Other findings, observations, and directions of the Appellate Tribunal were set aside.

Senior Counsel Dr Abhishek M Singhvi and Senior Counsel C Aryama Sundaram appeared for the resolution applicant. Senior Counsel Vijay Narayan appeared for the resolution professional.

Senior Counsel Mukul Rohatgi, Senior Counsel KV Vishwanathan, and Senior Counsel Dhruv Mehta appeared for the respective contesting parties.

Senior Counsel Rakesh Dwivedi appeared for Edelweiss & Associates. Solicitor General Tushar Mehta appeared for the SBI.