SUPREME COURT- MODIFIED RESOLUTION PLAN HAS TO BE APPROVED BY THE CoC BEFORE SUBMITTING IT TO NCLT.
In M.K. Rajagopalan v Dr. Periasamy Palani Gounder [Civil Appeal Nos. 1682-1683 of 2022], the Appellant filed a Petition u/s Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to initiate Corporate Insolvency Resolution Process (“CIRP”) against Appu Hotels Limited (“Corporate Debtor”). The Respondent is the Director of the Corporate Debtor. On 05.05.2020, the National Company Law Tribunal (“NCLT”) admitted the Corporate Debtor into the CIRP. The Appellant submitted a resolution plan for the Corporate Debtor. In 2021 during the ninth meeting of the Committee of Creditors (“CoC”), the resolution plan was conditionally approved by the CoC, however the CoC directed the Appellant to return the report to the creditors for further revision. Consequently, the allocation for the unsecured dissenting financial creditors has been revised from Rs. 29 crores to Rs. 49.13 crores in the modified plan.
The Appellant submitted the revised plan to the Resolution Professional, but it was never presented before the CoC and directly put up before the NCLT for its approval. However, despite not in adherence to the due procedure, the Resolution Plan was approved by the NCLT. Furthermore, the approved Resolution plan was challenged by the Appellant on various grounds before the National Company Law Appellate Tribunal (“NCLAT”). The NCLAT rejected the Resolution Plan approved by the NCLT, and the matter was remanded to the CoC. However, the Appellant was declared ineligible in terms of Section 88 of the Indian Trusts Act, 1882, and disqualified in terms of Section 164(2)(b) of the Companies Act, 2013. Aggrieved by the above order, the Appellant filed an appeal before the Supreme Court.
The Supreme Court held that the NCLT could not have approved the Resolution Plan for the following reasons, (i) the failure to get approval from the CoC of the revised resolution plan before seeking approval of the NCLT; and (ii) the ineligibility of the Appellant u/s 88 of the Indian Trust Act, 1882.
The Supreme Court observed that if the modified resolution plan, carrying whatsoever minor modification/revision, is not finally approved by CoC, then the presentation of such revised plan before the Adjudicating Authority for approval is an incurable material irregularity. Furthermore, the Court added, “This, in our view, is not the true operation of the scheme of the process of corporate insolvency resolution, nor could the commercial wisdom of CoC be a matter of assumption. Looking at the nature and form of the decision taken by the CoC in its ninth meeting, such a conditional approval could not have been treated as a final approval. Whereafter, whatever the revision, the plan was only to be presented to CoC and could have been presented to the Adjudicating Authority only after final approval of CoC by the requisite majority. In other words, when the modified resolution plan, even if carrying minor modification/revision, was not finally approved by CoC, its presentation to the Adjudicating Authority amounts to a material irregularity, and this defect cannot be cured.”
Moreover, while deciding upon the issue of whether there can be any post facto approval of a revised resolution plan by the CoC, the Bench held, “There is no, and there cannot be any concept of post facto approval of any resolution plan by CoC which had not been placed before it prior to the filing before the Adjudicating Authority.” Further, the Court added, “We would hasten to observe that the requirement of CIRP Regulations, particularly of placing the resolution plan in its final form before the CoC, has to be scrupulously complied with. No alteration or modification in the process could be countenanced. We say so for the specific reason concerning the law that if the process as adopted in the present matter is approved, the very scheme of the Code and CIRP regulations would be left open-ended and would be capable of inviting arbitrariness at any level.”