Effect of approval by adjudicating authority u/s 31(1) of IBC makes the resolution plan binding on all stakeholders: Apex Court accepts appeals, approves resolution plan submitted by successful applicants
Justices Sanjiv Khanna & Dipankar Datta [06-03-2024]

Read Order: DECCAN VALUE INVESTORS L.P. & ANR v. DINKAR VENKATASUBRAMANIAN & ANR [SC- CIVIL APPEAL NO. 2801/2020]

Tulip Kanth

New Delhi, April 1, 2024: While accepting the resolution plan submitted by the successful applicants -- Deccan Value Investors L.P. -- the Supreme Court has clarified that absence or ambiguity of details should put the parties to caution and it is for them to exercise discretion to submit or not submit the resolution plan.

The Division Bench of Justice Sanjiv Khanna and Justice Dipankar Datta was considering the cross-appeals under Section 62 of the Insolvency and Bankruptcy Code, 2016 filed by the successful resolution applicants – Deccan Value Investors L.P. and DVI PE (Mauritius) Ltd.; the Committee of Creditors of Metalyst Forgings Limited; and Dinkar Venkatasubramanian - the Resolution Professional of Metalyst Forgings Limited. The company-Metalyst Forgings Ltd. was the corporate debtor.

To justify the withdrawal, it was submitted that the successful resolution applicants were prevented, and were handicapped because of lack of information or rather fraud on the part of the resolution professional. It was concealed that 70% of the revenue of the corporate debtor came from trading, and not from manufacturing. It was submitted that the Mott Macdonald Report dated 30.09.2016 is factually incorrect and flawed.

It was also submitted that misleading and false statement was made with regard to the uninstalled imported components of 12,500 M.T. Press, which were stored in the land of a sister concern – Clover Forging and Machining Pvt. Ltd. The successful resolution applicants were misled in view of the non-reliability of financial data. There was ongoing financial/forensic audit.

“The aforesaid reasons or grounds taken by the successful resolution applicants do not qualify and cannot be treated as a fraud on the part of the resolution professional. This is not a case where misinformation or wrong information was given to the resolution applicants”, the Bench said.

Placing reliance upon the judgment in Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another [LQ/SC/2021/3009], the Bench said, “In our opinion, the impugned judgment dated 07.02.2020 passed by the National Company Law Appellate Tribunal (“NCLAT” for short), New Delhi, which upholds the order dated 27.09.2019 passed by the National Company Law Tribunal (“NCLT” or “adjudicating authority”, for short), Mumbai Bench, Mumbai, is legally flawed.”

The judgment in Ebix Singapore Private Limited (supra) had set out several reasons why the resolution applicant cannot be permitted to withdraw or modify the resolution plan after approval by the Committee of Creditors, and before an order under Section 31(1) of the Code is passed. These reasons include delay, consequences of the delay and the uncertainty and complexities that would arise in the Corporate Insolvency Resolution Process, which are unacceptable and not contemplated in law.  It was observed that even the terms of the resolution plan, will not permit withdrawal or modification in the absence of a statutory provision, that allow withdrawal or amendment in the resolution plan after approval by the Committee of Creditors.

The attention of the court was also brought to proviso to Section 31(1) of the Code, which postulates that the adjudicating authority, before passing an order for approval of the resolution plan, must satisfy itself that the resolution plan has provisions for its effective implementation.

The Bench noted that Ebix Singapore Private Limited (supra) did examine this provision but rejected the argument on several grounds, including absence of legislative mandate to direct unwilling Committee of Creditors to re-negotiate or agree to withdrawal of the resolution plan at the behest of the resolution applicant. The effect of approval by the adjudicating authority under Section 31(1) of the Code makes the resolution plan binding on all stakeholders, even those who are not members of the Committee of Creditors. The scrutiny by the adjudicating authority for grant of approval in terms of Section 31(1), read with other provisions of the Code, is limited and restricted. It does not allow or permit the resolution applicant to unilaterally amend/modify, or withdraw the resolution plan post approval by the Committee of Creditors, it opined.

In the matter at hand, the Bench noticed that the excise returns, as well as the VAT returns etc., were available in the virtual data room. The Mott Macdonald Report was submitted by the said consultants in September, 2016 at the behest of the erstwhile promoters/directors of the corporate debtor. The report itself was hedged with conditions and disclaimers. Value and worth of the report, the data and projections were for the prospective resolution applicants to evaluate.

On the aspect of 12,500 M.T. Press, it was clearly stated and noted that the said Press after import, was stored in the shed belonging to Clover Forging and Machining Pvt. Ltd.

Submission regarding the non-availability of Floor Space Index (FSI) at the plant in Aurangabad, was made with reference to the statement made by an employee of the corporate debtor and so the Bench was not inclined to accept this version of the successful resolution applicant. Moreover, the resolution plan submitted by the successful resolution applicants referred to the transaction audits being undertaken and acknowledged appropriation of the proceeds, if any available, to the resolution professional on the recoveries being made for prior period. Reference was also established on the principle of “clean slate”.

“Records of corporate debtor, who are in financial distress, may suffer from data asymmetry, debatable or even wrong data. Thus, the provision for transactional audit etc, but this takes time and is not necessary before information memorandum or virtual data room is set up. Financial experts being aware, do tread with caution. Information memorandum is not to be tested applying “the true picture of risk” obligation, albeit as observed by the NCLAT the resolution professional’s obligation to provide information has to be understood on “best effort” basis”, the Bench said while setting aside the impugned judgment and holding that the resolution plan, as submitted by the successful resolution applicants – Deccan Value Investors L.P. and DVI PE (Mauritius) Ltd stands approved.