Clarification on CIRP Cost Treatment in Resolution Plans: Mack Star Marketing Pvt. Ltd. v. Ashish Chawchharia

Introduction

The case of Mack Star Marketing Private Limited v. Ashish Chawchharia Resolution Professional of Jet Airways (India) Private Limited adjudicated by the National Company Law Appellate Tribunal (NCLAT) on May 30, 2022, centers around the classification and entitlement of monthly fees under the Corporate Insolvency Resolution Process (CIRP) costs. The appellant, Mack Star Marketing Pvt. Ltd., sought to have the monthly fees stipulated in their Service Agreement with Jet Airways treated as part of CIRP costs under the Insolvency and Bankruptcy Code (IBC). The primary issue revolved around whether these fees should be included in the costs approved by the resolution plan and, consequently, be payable by the resolution applicant.

Summary of the Judgment

The NCLAT, after reviewing the appellant's application for correction and clarification of the initial judgment dated May 6, 2022, found that while the appellant was entitled to have the monthly fees treated as CIRP costs, the resolution plan approved on June 22, 2021, did not provision for these specific costs. The resolution plan clauses (g) and (h) indicated that any excess in CIRP costs beyond current estimates, up to a maximum of ₹475 Crores, would be borne by the Successful Resolution Applicant (SRA). However, these clauses were not brought to the Tribunal's attention during the initial hearing. As a result, the Tribunal clarified that no monthly fees would be payable during the CIRP period under the current resolution plan but acknowledged the appellant's entitlement and directed further steps for the appellant to claim license fees post-CIRP.

Analysis

Precedents Cited

The respondents in the case relied on several NCLAT judgments to argue against the appellant's application for correction. Notably:

Action Barter Private Limited v. SREI Equipment Finance Limited and Ors. (2020) SCC OnLine NCLAT 1137 - Highlighted limitations on the Tribunal's ability to review judgments.
Adish Jain v. Sumit Bansal and Another (2021) SCC OnLine NCLAT 52 - Emphasized the absence of express provisions for review in the NCLAT Rules.
Deepak Kumar Director of Sovereign Infrastructure & Developers Ltd. v. Phoenix ARC Pvt. Ltd. & Anr (2020) SCC OnLine NCLAT 648 - Reinforced the stance on non-reviewability of final judgments.

These precedents collectively underscored the Tribunal's limited jurisdiction in reviewing judgments and the necessity for applications to align strictly with procedural rules, thereby weakening the appellant's position.

Legal Reasoning

The Tribunal's legal reasoning hinged on two main points:

Resolution Plan Provisions: The approval of the resolution plan concluded the CIRP. The plan contained clauses (g) and (h), which provided for the handling of excess CIRP costs up to ₹475 Crores by the SRA. However, these clauses were not presented during the initial hearing, limiting the Tribunal's ability to consider them in its judgment.
Application Under Rule 11: The appellant sought correction and clarification under Rule 11 of the NCLAT Rules, 2016. The Tribunal interpreted Rule 11 as granting inherent powers to correct errors due to oversight but not to revisit substantive findings. Since the appellant did not question the facts but sought to introduce new provisions from the resolution plan, the Tribunal denied the application.

The Tribunal maintained that the essence of the approved resolution plan was to cap CIRP costs, and any entitlement beyond the existing estimates was bound by the stipulated maximum. The failure to present clauses (g) and (h) earlier limited the Tribunal's capacity to adjust its original judgment accordingly.

Impact

This judgment reinforces the importance of presenting all relevant provisions of the resolution plan during hearings. Parties involved in insolvency proceedings must ensure comprehensive disclosure of plan clauses to avoid limitations in recourse post-approval. Furthermore, the Tribunal's stance on Rule 11 applications serves as a precedent for future cases, clarifying that mere oversight without substantive error does not warrant a review or modification of judgments.

In the broader context of IBC, the decision delineates the boundaries of CIRP cost allocations within resolution plans, emphasizing adherence to approved terms and procedural completeness. It may influence resolution professionals to meticulously incorporate all potential cost clauses in the resolution plan to safeguard against similar disputes.

Complex Concepts Simplified

CIRP (Corporate Insolvency Resolution Process): A legal framework under the IBC that facilitates the reorganization and resolution of financially distressed companies.

Resolution Plan: A comprehensive proposal submitted by a Resolution Applicant to resolve the insolvency of a debtor company, subject to approval by insolvency authorities.

Resolution Professional (RP): An individual appointed to oversee the CIRP, manage the company's assets, and act as a facilitator between creditors and Resolution Applicants.

CIRP Costs: Expenses incurred during the course of the resolution process, which can include professional fees, legal costs, and operational expenses necessary for the CIRP.

Rule 11 of the NCLAT Rules, 2016: Grants the Tribunal inherent powers to ensure justice and prevent abuse of the judicial process, allowing amendments to judgments only in cases of apparent errors or oversight.

Conclusion

The NCLAT's decision in Mack Star Marketing Pvt. Ltd. v. Ashish Chawchharia underscores the critical need for complete and transparent presentation of resolution plan clauses during insolvency proceedings. While the Tribunal recognized the appellant's entitlement to have monthly fees considered as CIRP costs, procedural oversights and the absence of certain resolution plan clauses during the initial hearing constrained the final judgment. This case serves as a pivotal reference for insolvency practitioners and companies undergoing CIRP, highlighting the necessity for meticulous adherence to procedural protocols and comprehensive disclosure to ensure equitable outcomes.