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Mr. Sharad Sanghi v. Vandana Garg And Others
Factual and Procedural Background
The Corporate Insolvency Resolution Process was initiated against Jyoti Structures Ltd. on 12th July, 2017. The Appellant, Mr. Sharad Sanghi, filed a Resolution Plan which was improved after negotiations with the Committee of Creditors (CoC). E-voting by the CoC began on 26th March, 2018 and continued until 6th April, 2018, during which the voting shares in favor of the plan increased from 62.66% to 81.31% as some members changed their votes from dissent or abstention to approval. The Resolution Professional submitted the approved Resolution Plan to the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench), requesting exclusion of certain periods for counting the resolution timeline.
However, the Adjudicating Authority rejected the Resolution Plan by order dated 31st July, 2018 and ordered liquidation. The rejection was primarily based on two grounds: the lapse of 270 days by the time the last vote was cast and the fact that the voting percentage on 26th and 27th March, 2018 was below the required 75%. The prayer for exclusion of the period was not addressed. This order is challenged in these appeals.
Legal Issues Presented
- Whether the period of eight days between admission of the application and uploading of the order should be excluded from the 270-day timeline prescribed under the Insolvency and Bankruptcy Code.
- Whether the Committee of Creditors can change their votes after the initial e-voting process, especially in light of Regulation 26(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
- Whether the Resolution Plan approved by the Committee of Creditors with 81.31% voting shares should have been accepted despite the Adjudicating Authority's rejection.
- The applicability and effect of the timing and voting thresholds under Section 30 of the Insolvency and Bankruptcy Code, 2016, in the context of this Resolution Plan.
Arguments of the Parties
Appellant's Arguments
- The eight-day period between admission and order upload should be excluded from the 270-day limit based on precedent from Quinn Logistics India Pvt. Ltd. vs. Mack Soft Tech Pvt. Ltd.
- The Committee of Creditors has the authority to extend voting periods and allow members to change their votes, and Regulation 26(2) is directory and cannot override this power.
- The Resolution Plan was approved by the CoC with 81.31% voting shares, satisfying the required threshold.
Respondent's Arguments (DBS Bank Ltd.)
- DBS Bank Ltd. claimed a first charge on certain assets with exposure of Rs. 53.77 Crores and argued that the Resolution Plan did not recognize the priority of first charge holders over second charge holders.
- Relied on the Supreme Court decision in ICICI Bank Ltd. vs Sidco Leathers Ltd. & Ors to assert the primacy of first charge holders.
- Referenced UNICITRAL and World Bank principles on insolvency and creditor/debtor regimes.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Quinn Logistics India Pvt. Ltd. vs. Mack Soft Tech Pvt. Ltd. SCC OnLine NCLAT 243 | Exclusion of the period during which the Interim Resolution Professional had not joined from the 180/270 days timeline. | The court held that the eight-day period before the Interim Resolution Professional joined should be excluded, thus the Resolution Plan was approved within the prescribed 270-day period. |
| ICICI Bank Ltd. vs Sidco Leathers Ltd. & Ors (2006) 10 SCC 452 | Priority of claims of first charge holders over second charge holders. | The court noted the argument but declined to accept it in the context of the Resolution Process, emphasizing that all Financial Creditors are treated equally under the I&B Code. |
Court's Reasoning and Analysis
The court analyzed the timeline of the Corporate Insolvency Resolution Process and found that the eight-day period between admission and uploading of the order should be excluded from the 270-day limit, based on the precedent set in Quinn Logistics India Pvt. Ltd. The court observed that the voting process extended until 6th April, 2018, with the Committee of Creditors ultimately approving the Resolution Plan with 81.31% voting shares.
Regarding Regulation 26(2) of the Insolvency and Bankruptcy Board of India Regulations, which prohibits changing votes once cast, the court held that this provision was directory and could not override the CoC’s power to change opinions. The Regulation was deleted by the Insolvency and Bankruptcy Board of India with effect from 4th July, 2018, acknowledging its impracticality.
The court emphasized that the Committee of Creditors has the authority to evaluate the viability and feasibility of a Resolution Plan and to extend or modify the voting process as necessary. It rejected the Adjudicating Authority’s reliance on the initial voting percentage being below 75% and the lapse of 270 days without considering the exclusion period, holding that the Resolution Plan was validly approved within the statutory timeline.
On the objection raised by DBS Bank Ltd. regarding the priority of first charge holders, the court noted that under the Insolvency and Bankruptcy Code, all Financial Creditors are treated equally if similarly situated, and thus the objection was not accepted.
Finally, the court remitted the matter back to the Adjudicating Authority to approve the Resolution Plan with a modification that the plan be implemented within 12 years instead of 15 years as offered by the Resolution Applicant.
Holding and Implications
The appeals are allowed and the impugned order dated 31st July, 2018 is set aside. The Resolution Plan approved by the Committee of Creditors with 81.31% voting shares is held to be valid and within the prescribed 270-day period after excluding the initial eight days.
The matter is remitted to the Adjudicating Authority, Mumbai Bench, for approval of the Resolution Plan in accordance with Section 31 of the Insolvency and Bankruptcy Code, 2016, with the modification that the plan implementation period be reduced to 12 years.
The decision clarifies the authority of the Committee of Creditors to change votes within the timeline and confirms the exclusion of certain periods from the insolvency timeline. No new precedent beyond the direct effect on the parties is established.
SUDHANSU JYOTI MUKHOPADHAYA, J. In all these appeals as common impugned order dated 31st July, 2018 is under challenge and common question of law is involved, they were heard together and disposed of by this common judgment.
2. The Corporate Insolvency Resolution Process was initiated against Jyoti Structures Ltd.- (Corporate Debtor) on 12th July, 2017. The Appellant- Mr. Sharad Sanghi filed Resolution Plan along with others. After negotiation with the Committee of Creditors, the Resolution Plan was improved by the Appellant. E-voting of the Committee of Creditors was held between 26th March, 2018 and 27th March, 2018 during which members with 62.66% voting shares voted in favour of the Resolution Plan; members with 23.12% voting shares voted against the Resolution Plan and members with 14.21% remained abstained. On 27th March, 2018, after taking into consideration the result, the IDBI Trusteeship Services having 0.42% voting shares and Ms. Hema Shah having 0.04% voting shares, who earlier voted against, changed their opinion and conveyed favourable vote on the same date i.e. on 27th March, 2018.
3. The Indian Bank having voting shares of 6.31% which had abstained from voting previously, sent a letter to the Resolution Professional approving the Final Resolution Plan. The Standard Chartered Bank having 3.31% voting shares changed its dissent on 2nd Company Appeal (AT) (Insol.) Nos. 461, 464 & 548 of 2018 April, 2018 and assented in favour of the Resolution Plan. The Bank of India having 9.11% voting shares changed its dissent on 6th April, 2018 and assented in favour of the Resolution Plan. Thus, in fact, the voting which started on 26th March, 2018 continued upto 6th April, 2018. Finally, the Committee of Creditors with 81.31% of the voting shares approved the Resolution Plan on 6th April, 2018.
4. The Resolution Professional submitted the approved Resolution Plan of Mr. Sharad Sanghi before the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Mumbai, and also requested to exclude certain period. However, the Adjudicating Authority by impugned order dated 31st July, 2018 rejected the prayer and ordered for liquidation, though it noticed that the total votes in favour of the Resolution Plan stood at 81.31% after including the votes of Standard Chartered Bank, Mr. Konnongo and Bank of India.
5. The aforesaid rejection was made mainly on two grounds. One of the grounds is that total period of 270 days had lapsed by the time last voting took place on 2nd April, 2018. Secondly, as on 26th and 27th March, 2018, the voting percentage was 62.66% which is less than 75%. Prayer for exclusion of the period has not been discussed.
6. The Adjudicating Authority while passing the impugned order also noticed the viability and the feasibility of the Resolution Plan and observed as follows: Company Appeal (AT) (Insol.) Nos. 461, 464 & 548 of 2018
38. So far, many companies have come into initiation of this insolvency process, but we have hardly come across any company where asset value is more than liability, except a company that is known to everybody that is the case of Binani Cements. Most of the resolution plans are also with haircuts of 75%, 80%, hardly any money coming back through resolution plans, those plans are flagged with time-limes of 5 years, 10 years, in this case for 15 years for payment. This is the ground situation in respect to the resolution plans coming before us.
39. In this cae, the admitted claim against this company is Rs. 7,010.55 crores, liquidation is Rs. 1,112.52crores. we have not come across anywhere as to what the fair value of this company is. The resolution plan given in this case will result into 43% haircut to the creditors of the company. Out of Rs.3,965.06crores, value of the resolution plan amount, only Rs.50crores will come as up-front payment, Rs.75crores will come in one year, remaining will come to the Company Appeal (AT) (Insol.) Nos. 461, 464 & 548 of 2018 creditors in as staggered payments in a period of 15 years from the effective date.
40. We dont want to get into as to whether such a plan is reasonable or not, because to test the reasonableness, viability, feasibility, the CoC has given the authority to take a decision with the power conferred upon them. We cannot transgress into the jurisdiction of CoC, unless process id devoid of the set procedures, fairness and transparency.
7. Learned counsel appearing on behalf of the Appellants submitted that application under Section 7 was admitted on 4th July, 2017 and order was signed and uploaded on 12th July, 2017 i.e. after eight days whereinafter the Interim Resolution Professional had taken charge.
8. Referring to the decision of this Appellate Tribunal in Quinn Logistics India Pvt. Ltd. vs. Mack Soft Tech Pvt. Ltd. SCC OnLine NCLAT 243, learned counsel for the Appellants submitted that the aforesaid period of eight days if excluded, then it will be clear that the approved Resolution Plan was approved and submitted within 270 days which comes to 8th April, 2018.
9. Regulation 26 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 Company Appeal (AT) (Insol.) Nos. 461, 464 & 548 of 2018 deals with voting through electronic means. Clause (2) of the Regulation
26 as it then was, is as follows:
26. Voting through electronic means. xxx xxx xxx (2) Once a vote on a resolution is cast by a member of the committee, such member shall not be allowed to change it subsequently. In view of the aforesaid Regulation 26(2), the Adjudicating Authority refused to accept the change of voting as made by some of the members of the Committee of Creditors.
10. Under sub-section (3) of Section 30, the Resolution Professional is required to present to the Committee of Creditors for its approval such Resolution Plans which confirm the conditions referred to in sub-section (2). It is the Committee of Creditors which fix the date of voting and may approve the Resolution Plan by vote of not less than 75% (now it is 66%) of voting shares of the Financial Creditors, after considering its viability and feasibility and such other requirements as may be specified by the Board.
11. As per sub-section (5) of Section 30, the Resolution Applicant is required to attend the meeting of the Committee of Creditors in which the Resolution Plan of the Applicant is considered. Company Appeal (AT) (Insol.) Nos. 461, 464 & 548 of 2018
12. From the aforesaid provisions, it is clear that the Committee of Creditors is required to notice the Resolution Plan to find out its viability and feasibility apart from the financial matrix and in appropriate cases may ask the Resolution Applicant to improve the plan. The date of approval for Resolution Plan is fixed by the Committee of Creditors. They may fix the date of voting and in appropriate case they may extend the period of voting. There is no provision that once a voting is made, after the final result, if it comes to the conclusion finally in absence of approval of the plan, the Corporate Debtor may be ordered for liquidation. It is always open to the Committee of Creditors to change their opinion.
13. Whether a member who has already opined, after final decision, can change its opinion or not? It is the matter which can be decided by the Committee of Creditors, which may extend the period and allow to have fresh voting. Regulation 26(2) being directory cannot override the power of the Committee of Creditors, which is the final decision making authority in accepting or rejecting a Resolution Plan. The Insolvency and Bankruptcy Board of India also noticed that Regulation 26(2) is not workable and will amount to interference with the power of the Committee of Creditors as vested under the Insolvency and Bankruptcy Code, 2016 and therefore, the Insolvency and Bankruptcy Board of India deleted Regulation 26(2) w.e.f. 4th July, 2018. If it would not have been Company Appeal (AT) (Insol.) Nos. 461, 464 & 548 of 2018 deleted, one could have argued that Regulation 26(2) is arbitrary as it does not allow the Committee of Creditors to form its final opinion.
14. A Resolution Plan which may be viable, feasible and of acceptable financial matrix and which is not against the provision of Section 30(2), if majority of the members having voting shares approve it but falls short of the 75% (now 66%) limit as has been prescribed and later on it comes to the notice of one or other members that because of the failure the Corporate Debtor will be liquidated, it is always open to the members to change its opinion subsequently with the approval of the rest of the members of the Committee of Creditors but it should be within 270 days.
15. In view of the aforesaid findings and the facts as emerges, we hold that the Resolution Plan in question stands approved by the Committee of Creditors with 81.39% voting shares.
16. In the case of Quinn Logistics India Pvt. Ltd. (Supra) which was affirmed by the Honble Supreme Court, this Appellate Tribunal observed that the period of non-joining of the Interim Resolution Professional should be excluded for the purpose of counting the total period of 180 days or 270 days.
17. In the present case, as the application was admitted on 4th July, 2017 and after signature it was uploaded on 12th July, 2017 i.e. eight days and the Interim Resolution Professional joined much thereafter, we are of the view that the Adjudicating Authority should have excluded at Company Appeal (AT) (Insol.) Nos. 461, 464 & 548 of 2018 least eight days of period during which the order was passed, signed and subsequently uploaded. If the aforesaid period of eight days is excluded, then we find that the Resolution Plan was approved within 270 days which the Adjudicating Authority has failed to notice.
18. We have not counted the actual period, taking into consideration the date when the Interim Resolution Professional had joined. The order of admission having signed and uploaded on 12th July, 2017, after excluding eight days, we hold that the process was conducted within the period.
19. DBS Bank Ltd. while opposed the appeal, learned counsel submitted that its claims of Rs. 53.77 Crores with the Corporate Debtor has first charge over certain assets of the Corporate Debtor. It is also submitted that the liquidation value of the assets charged to DBS Bank Ltd. is more than three times of its exposure. The Resolution Plan having not recognized the difference between the first charge holder and the second charge holder but has distinguished between the secured and unsecured creditor, the Bank has raised grievances against the Resolution Plan.
20. Reliance has been placed on the decision of the Honble Supreme Court in ICICI Bank Ltd. vs Sidco Leathers Ltd. & Ors. (2006) 10 SCC 452), wherein the Honble Supreme Court held that the claim of first charge holder will prevail over the claims of second charge holder. Company Appeal (AT) (Insol.) Nos. 461, 464 & 548 of 2018
21. Reliance has also been placed on United National Commission on International Trade Law (UNICITRAL) and Principles for Effective Insolvency and Creditor/ Debtor Regime, published by World Bank.
22. However, the aforesaid submissions cannot be accepted as at the Resolution Process, Financial Creditor claims are decided as per provision of the I&B Code. All the Financial Creditors are treated to be similar, if similarly situated.
23. We have noticed that the Adjudicating Authority has made certain observations with regard to the timeline given by the Resolution Applicant. Learned counsel appearing on behalf of the Resolution Applicant submits that the total period of 15 years will be reduced to 12 years.
24. In view of the aforesaid findings and as we have already held that the Resolution Process took place within 270 days and the Committee of Creditors had the jurisdiction to change its opinion in favour of the Resolution Plan to make it a success and Regulation 26(2) being directory which also stands deleted, we set aside the impugned order and hold that the Resolution Plan being in conformity with Section 30(2) warranted approval by the Adjudicating Authority.
25. However, we make it clear that to make the Resolution Process successful, though it is open to the Committee of Creditors to change its opinion by assenting in favour of one or other plan, we further hold that Company Appeal (AT) (Insol.) Nos. 461, 464 & 548 of 2018 the Committee of Creditors once voted in favour of the Resolution Plan cannot change its views.
26. In the result, the case is remitted to the Adjudicating Authority, Mumbai Bench, Mumbai to approve the plan in terms of Section 31 of the Insolvency and Bankruptcy Code, 2016 with modification i.e. that the plan is to be implemented within the period of 12 years as offered by the Successful Resolution Applicant. The appropriate order be passed on an early date preferably within two weeks from the date of the production of the copy of this order. All the appeals are allowed with the aforesaid observations and directions. No cost. [Justice S.J. Mukhopadhaya] Chairperson [Justice Bansi Lal Bhat] Member [Judicial] NEW DELHI 19th March, 2019
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