Material irregularity in exercise of powers by the Resolution Professional, even with the approval of CoC, in the conduct of CIRP cannot be treated as an exercise of Commercial Wisdom: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has held that the approved Resolution Plan can be challenged before the Adjudicating Authority on limited grounds referred to in Section 30(2) or the Appellate Authority on ground of material irregularity in exercise of the powers by the Resolution Professional during the Corporate Insolvency Resolution period. The material irregularity in exercise of powers by the Resolution Professional, even with the approval of CoC, in the conduct of CIRP cannot be treated as an exercise of Commercial Wisdom.

The NCLAT was posed with three questions:

1. Whether the RP with the approval of CoC, was authorized to accept the Resolution Plans after the expiry of the deadline for submission of the Bid, without extending the timeline for submission of EOI?

2. Whether the act of the RP, with the approval of CoC, in accepting the Resolution Plan after the expiry of the deadline for submission of Resolution Plan, can be treated as an act under commercial wisdom of the CoC covered by the SC Judgement of K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150

3. Whether Amended Regulation 36A, which came into effect from 04.07.2018, will be applicable in this case, where CIRP is initiated against the Corporate Debtor before coming into force of the amended Regulation?

4. Whether Judgment of the Bench consisting of Member (Technical), who has not heard the argument regarding MA No.1039 of 2019 is valid?

With respect to Issue no 1&2 regarding commercial wisdom of CoC and scope of intervention by NCLT /NCLAT:-

After hearing the parties at length and also going through all the case law (K Sashidhar case and Binani Industries Case) in respect of the issue of commercial wisdom of CoC and the scope of the National Company Law Tribunal (NCLT/Adjudicating Authority) as well as that of NCLAT (Appellate Authority), the NCLAT held that for approval of Resolution Plan, the Adjudicating Authority can only exercise power under section 30(2) read with Sec 31(1)  and the Appellate Court can only exercise its power under Sec 61(3) of the I&B Code.

In the instant case, the Adjudicating Authority had not given any finding on the issues raised in MA 1039 of 2019 by the Appellant, specifically regarding illegalities committed, in accepting the Resolution Plan of the successful Resolution Applicant. The Adjudicating Authority has justified the actions of the Resolution Professional on the ground that the alleged act of accepting the Resolution Plan is based on the commercial decision of the CoC. It is important to mention that the approval of the Resolution Plan depends on the business decision of CoC. Still, the CoC is not empowered to approve the illegalities committed in the conduct of CIRP.

“At the cost of repetition, we reiterate that illegal exercise of power by the Resolution Professional in conducting CIRP cannot be treated as an exercise of power for maximization of value under Commercial Wisdom.”

With respect to Issue no 3, the NCLAT held that Regulation 36A(6) which was introduced vide Notification No. IBBI/201819/GN/REG031, clearly states that the amended CIRP Regulations shall apply to CIRP commencing on or after 04th July 2018. The Corporate Debtor was admitted to CIRP on 14th May 2018, and hence, the amendments introduced vide notification No. IBBI/201819/GN/REG031 is not applicable to Corporate Debtor’s CIRP.

Issue no 4 - Order passed by a member not being one who heard the arguments

The NCLAT held as under –

The salutary principle applicable in the instant case is that of the maxim, “one who hears the matter must decide.” It is the Single Member Bench which had heard the argument of the MA 1039 of 2019 and thus, it alone could have decided it. Merely because the presiding member of the Single Member Bench was also a part of the reconstituted Division Bench of the Tribunal comprising of two members, it does not mean that he could have taken up the Applicant’s MA No.1039 of 2019 along with the MA No.691 of 2019.

Thus, the Bench has passed the Order on the MA No.1039 of 2019, even though the other Member of the Bench, Member (Technical), didn’t get an opportunity to hear the arguments on that application. Rule 150(2) NCLT Rules, 2016 provides for the Bench which hears the case to also pronounce the Order.

The NCLAT passed a final order directing the CoC to take a decision afresh for consideration on the Resolution Plans already submitted within the stipulated timeline within ten days from the date of this Order. If no decision is communicated to the Adjudicating Authority and the timeline for completion of CIRP has already expired, then the Adjudicating Authority is to pass an order for liquidation of the corporate.

Sr Counsel Ramji Srinivasan appeared for the Appellants before the NCLAT Delhi.

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