Introduction

The National Company Law Appellate Tribunal (NCLAT) delivered a landmark judgment on April 12, 2022, in the case of Rana Saria Poly Pack Pvt. Ltd. v. Uniworld Sugars Pvt. Ltd. And Another. This case navigates the complexities of the Insolvency and Bankruptcy Code, 2016 (IBC), focusing particularly on the procedures surrounding valuation during the Corporate Insolvency Resolution Process (CIRP). The appellants, Rana Saria Poly Pack Pvt. Ltd. and Simbhaoli Sugars Limited, challenged the Impugned Order dated March 17, 2021, which approved a resolution plan based on a disputed third valuation report.

Summary of the Judgment

The NCLAT examined two primary appeals filed under Section 61 of the IBC. Central to both appeals was the objection to an Impugned Order that approved a resolution plan predicated on a third liquidation valuation report, which the appellants contended was procedurally flawed and significantly undervalued the corporate debtor, Uniworld Sugars Pvt. Ltd. The appellants argued that the third valuation did not comply with the CIRP Regulations, specifically Rules 27 and 35, and thus should not form the basis for creditor payments. The tribunal, after a detailed analysis, set aside the parts of the Impugned Order related to the allocation of payments, directing the resolution professional to revise the payments in accordance with the first two valuations.

Analysis

Precedents Cited

The judgment extensively referenced several pivotal cases that shaped the tribunal's reasoning:

• Committee of Creditors of Essar Steel v. Satish Kumar Gupta (2020): Affirmed the binding nature of the Committee of Creditors' (CoC) decisions on resolution plans.
• K. Sashidaran v. Indian Overseas Bank (2018): Highlighted limited judicial review over CoC's commercial decisions.
• Pratap Technocrats Pvt. Ltd. v. Monitoring Committee of Reliance Infratel (2021): Emphasized the necessity of balancing stakeholder interests while formulating resolution plans.
• Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh and Others (2021): Discussed the prioritization of operational creditors and the role of liquidation value in resolving insolvency cases.
• Binani Industries Ltd. v. Bank of Baroda & Another (2018): Addressed the implications of valuation discrepancies on resolution plans.

Legal Reasoning

The tribunal's decision hinged on the strict adherence to the CIRP Regulations outlined in the IBC. Specifically:

• Regulation 27 & 35 of CIRP Regulations, 2016: Mandated the appointment of two registered valuers to determine the fair and liquidation value of the corporate debtor. If significant discrepancies existed between these valuations, a third valuer could be appointed, with the average of the two closest estimates considered as the definitive valuation.
• The tribunal found that the third valuation undertaken in this case did not follow the prescribed procedural norms. The significant disparity between the initial two valuations (₹126.30 crore and ₹121.01 crore) and the third valuation (₹52.69 crore) highlighted procedural irregularities.
• Furthermore, the CoC's decision to accept the third valuation without seeking clarifications from the valuers themselves breached the procedural safeguards intended to ensure accurate and unbiased valuations.
• The tribunal underscored the importance of accurate liquidation valuations in determining fair payments to operational creditors under Section 30(2)(b) of the IBC, thereby ensuring the objective of maximizing asset value and equitable treatment of all stakeholders.

Impact

This judgment sets a crucial precedent for future CIRP proceedings by reinforcing the necessity of compliance with valuation procedures under the IBC. Key implications include:

• Enhanced Procedural Compliance: Corporate debtors and resolution professionals must strictly adhere to the valuation procedures outlined in the CIRP Regulations to avoid similar judicial interventions.
• Accuracy in Creditor Payments: Accurate and justified liquidation valuations are imperative to ensure fair compensation to operational creditors, thereby upholding the IBC's objectives.
• Judicial Scrutiny: The tribunal's insistence on procedural correctness limits the extent to which commercial wisdom can override statutory mandates, ensuring that creditor payments are not arbitrarily determined.
• Strengthening Stakeholder Confidence: By mandating rigorous valuation processes, the decision enhances trust among stakeholders regarding the fairness and transparency of insolvency resolutions.

Complex Concepts Simplified

Corporate Insolvency Resolution Process (CIRP)

CIRP is a structured process under the IBC aimed at resolving the insolvency of corporate debtors by facilitating their revival or orderly liquidation. It involves the appointment of an insolvency professional, formation of the Committee of Creditors (CoC), and formulation and approval of a resolution plan.

Committee of Creditors (CoC)

The CoC comprises financial creditors and holds significant power in approving or rejecting resolution plans. Their decisions are binding on minority creditors and are subject to limited judicial review.

Liquidation Value

This represents the estimated amount that can be realized from selling the corporate debtor's assets in a forced liquidation scenario. It serves as a benchmark for ensuring that payments to operational creditors under a resolution plan are fair.

Resolution Plan

A proposal submitted by a resolution applicant outlining how the corporate debtor will be revived, including asset restructuring, debt repayment schedules, and stakeholder compensation mechanisms.

Conclusion

The NCLAT's decision in Rana Saria Poly Pack Pvt. Ltd. v. Uniworld Sugars Pvt. Ltd. underscores the judiciary's commitment to upholding the procedural mandates of the IBC, particularly concerning asset valuations during insolvency resolutions. By mandating the exclusion of the improperly conducted third valuation and reinstating the accurate average of the initial two valuations, the tribunal reinforced the necessity for meticulous adherence to established regulations. This judgment not only ensures fair treatment of all stakeholders but also fortifies the integrity of the insolvency resolution framework, thereby fostering a more reliable and equitable environment for corporate debt resolution in India.