Bank of Baroda and Anr. vs Mbl Infrastructures Ltd. & Ors.
Date of Order:
18th January 2022
Hon’ble Justice Sanjay Kishan Kaul,
Hon’ble Justice M.M Sundresh
A judicial interpretation of Section 29A(h) of the Insolvency and Bankruptcy Code, 2016 was sought. The court held that the plan submitted by Respondent No.3 should not have been entertained, as it was ineligible and not maintainable.
- M/s. MBL Infrastructures Ltd (Respondent No. 1) was set up by Mr. Anjanee Kumar Lakhotiya in the early 1990s. Loans/credit facilities were obtained by Respondent No.1 from SBI as a lead bank. On the failure of Respondent No.1 in terms of repayment, some of the respondents (a consortium of banks) were forced to invoke the personal guarantees extended by Respondent No.3.
- That is the M/s. State Bank of Bikaner and Jaipur merged with State Bank of India, with RBL Bank having issued notices under Sec- 13 of the SARFAESI Act of 2002, followed by Allahabad Bank and State Bank of Bikaner and Jaipur.
- M/s. RBL Bank filed an application to initiate a corporate insolvency resolution process (CIRP) against Respondent No.1, leading to a moratorium and an additional 90 days of CIRP. Two resolution plans were received by the Resolution Professional, one authored by Respondent No.3. prior to the introduction of Section 29A of IBC.
- The Insolvency and Bankruptcy Code (Amendment), 2017 introduced Section 29A to the Code. Respondent No.3 filed an application for a declaration that he was not disqualified from submitting a resolution plan.
- The adjudicating authority ruled that there is no disqualification per se under Section 29A(h) of the Code, as liability under a guarantee arises only upon its invocation. Respondent No. 3 could not be considered a defaulter for breach of the guarantee.
- Respondent No.3 filed an application invoking Section 60 of the Code, and a further amendment to Section 29A(h) came into effect on 18.01.2018, which states that a person is not eligible to submit a resolution plan if they have executed an enforceable guarantee. The appellate tribunal passed an order allowing the Appellant to withdraw the appeal without any liberty to challenge the same impugned order, dismissing the appeal as withdrawn. The appellant's counsel opposed the prayer, but the appellate tribunal was not inclined to the ground of opposition.
- The order was passed allowing appellants to withdraw appeals against the order of eligibility of Respondent No.3, as the resolution plan had the mandatory requirement of 75%. It was also held that the issue of eligibility under Section 29A(h) was already decided and that the application filed for approval of the resolution plan submitted by the Respondent No.3 was liable to be allowed.
- Section 29A(h) was amended by an ordinance dated 06.06.2018, which became an Act with effect from the same date. A person is not eligible to submit a resolution plan if they are acting jointly or in concert with another person.
- The appeals were dismissed on the basis that the plan was approved with 78.50% of the voting share of the CoC and backed by a techno-economic report.
- Under Section 30 of IBC, the percentage required for approval of a resolution plan by the CoC has been reduced from 75% to 66% of the CoC's voting share.
1) On May 28, 2016, the Indian Parliament passed the Insolvency and Bankruptcy Code, 2016. The adoption of a resolution plan for the corporate debtor is one of the main goals of the code. In order to prevent those who might negatively affect the entire corporate insolvency resolution process from offering a resolution plan, Section 29A was incorporated into the Code in November 2017. Additionally, this would help to uphold the timelines outlined by IBC, which were otherwise compromised by the exploitation of the flaws in the bidding process.
ARGUMENTS ADVANCED BY THE APPELLANT
- Respondent No.3 was ineligible to submit a resolution plan under Section 29A(h) of the Code due to several personal guarantees signed in favor of different creditors of Respondent No.1. The adjudicating authority ignored this information on both occasions, and even Respondent No. 2 was unable to present it. This means the presumption used by the adjudicating body to determine that Respondent No. 3 was qualified to submit a resolution plan is initially false.
- Section 29A(h) and Section 30(4) must be interpreted using the same analogy, meaning the disqualification becomes effective as of the application date. Fraud taints all solemn acts, so the appeal should be granted. Legal ineligibility cannot be removed by alleged estoppel.
- The appellate tribunal's order confirming the adjudicating authority's decision must be set aside as the appellant was not a party before it on previous occasions.
ARGUMENTS ADVANCED BY THE RESPONDENT
- This Court does not have to intervene in a decision made by the CoC to be satisfied with the expert's report on the viability and feasibility of the resolution plan. The revised plan approved by the appellate tribunal is an improvement over the original one provided by Respondent No. 3.
- The Code's objective must be read in conjunction with Section 29A. The appellant is restrained from contesting Respondent No. 3's eligibility to submit a resolution plan in accordance with Section 29A(h), meaning that a personal guarantor is only prevented from submitting a resolution plan when the creditor using the adjudicating authority's jurisdiction has used a personal guarantee that the resolution applicant had executed in their favor.
- While Allahabad Bank and State Bank of Bikaner and Jaipur's use of a consortium guarantee under Section 13(2) of the SARFAESI Act, 2002 is an ex-failure because of the inter-se agreement between the members, RBL Bank did not invoke a personal guarantee. Before the adjudicating authority, neither the Allahabad Bank nor the State Bank of Bikaner and Jaipur submitted an application.
- The counsels for the Respondents have sought to rely on the decisions of Swiss Ribbons (P) Ltd., K.N. Rajkumar, Arcellor Mittal India Pvt. Ltd., and Committee of Creditors, Essar Steel India Ltd.
- Section 29-A was introduced in Chitra Sharma v. Union of India (2018) 18 SCC 575, which was highlighted in the Statement of Objects and Reasons accompanying the Bill.
- According to the Court, Section 29-A was passed in the public interest and to support efficient corporate governance. Additionally, it was mentioned that Parliament had closed a gap in the Act that permitted former management of CIRP to enter through a backdoor.
- The standard underlying Section 29-A "continues to permeate" Section 35(1)(f) when it applies to both resolution applicants and liquidation, according to the ruling in Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17. The Court ruled that both movable and immovable property should be sold to anyone, including those who are not qualified to be resolution applicants, rejecting the argument that Section 35(1)(f) is ultra vires.
- The bar qua eligibility of a person who executes a guarantee in favor of a creditor with respect to credit facilities availed by a corporate debtor will come into play.
- The clause calls for a guarantee in favor of "a creditor" to ensure that all creditors belonging to the same class are treated equally and have equal rights. This Court also addressed this position in Swiss Ribbons (supra). If the Committee of Creditors has not yet been formed, a party may contact NCLT directly. After hearing from all parties and taking into account all pertinent information, the Tribunal will decide whether to approve or reject a request for withdrawal or settlement.
- If there is a bar at the time of submission, a resolution applicant's submission of a resolution plan cannot be maintained. The amended provision, however, will control the eligibility issue if the submission is maintainable and a person loses eligibility. The resolution applicant's only responsibility is to facilitate the process; if an applicant is found to be ineligible, the same procedure must be followed, contrary to the earlier provision. There is no justification for merely filing or submitting a resolution plan.
- The third respondent signed personal guarantees that three of the financial creditors had already used before the application was filed. This highlights the strictness of Section 29A(h) of the Code, which must include all other financial creditors. In this case, one of these creditors filed an application invoking Section 7, which was used by Respondent No. 3 even when submitting a resolution plan.
- The adjudicating authority and appellate tribunal erred when they rejected the appellant's arguments on the grounds that since earlier appeals had been withdrawn without liberty, the eligibility issue could not be brought up again. The issue of law is unresolved, so the appellate tribunal's reasoning cannot be upheld in law.
- The court agreed with the adjudicating authority and appellate tribunal on the issue of limitation. The adjudicating authority correctly excused and disregarded the 106-day delay by using Section 12(3) of the Code. The adjudicating authority concluded that there is a distinction between extension and exclusion, as exclusion would be relevant if appealed to a higher forum.
- The amended provision will control the eligibility issue if the submission is maintainable and a person loses eligibility. There is no justification for filing or submitting a resolution plan.
- Respondent No. 3's resolution plan is unmaintainable due to his ineligibility, but the necessary portion of voting shares has been obtained and Section 30(4) of the Code has been changed to 66%.
- The court emphasized that the primary goal of the Code is to get the corporate debtor back on track and that the resolution plan protects the rights of the dissenting creditors and allows them to recoup their credit limits. Therefore, the court does not wish to interfere with the resolution plan.
- The appeal was dismissed, and all applications were quashed without incurring any additional costs.