Good News! Apex Court Holds Retired Bankers and Receiving Pension Eligible to be Appointed As Resolution Professional in CIRP

Appellate Tribunal’s judgment holding that an Insolvency Professional who was in service and getting pension from a financial creditor was disentitled to be a Resolution professional has been rejected by the Supreme Court. In an order passed by a 3-judge bench on 19th August, 2020, the Supreme Court has categorically held that the approach adopted by NCLAT is not correct “that merely Resolution Professional who remained in the service of SBI and is getting pension, was disentitled to be Resolution professional” .

The Court held that since the order of NCLAT does not reflect correct approach, the same shall not be considered as a precedent. Incidentally, following its own judgment, NCLAT, in another case, also followed it and removed another past banker who was drawing pension.

Appellate Tribunal’s judgment holding that an Insolvency Professional who was in service and getting pension from a financial creditor was disentitled to be a Resolution professional has been rejected by the Supreme Court. In an order passed by a 3-judge bench on 19th August, 2020, the Supreme Court has categorically held that the approach adopted by NCLAT is not correct “that merely Resolution Professional who remained in the service of SBI and is getting pension, was disentitled to be Resolution professional” .

The Court held that since the order of NCLAT does not reflect correct approach, the same shall not be considered as a precedent. Incidentally, following its own judgment, NCLAT, in another case, also followed it and removed another past banker who was drawing pension.

Who Wins – Equitable Consideration or Commercial Wisdom of CoC?

Abstract

This piece deals with the jurisprudence whether the Adjudicating Authority or the Appellate Authority has the authority to reject a resolution plan approved with requisite majority by the Committee of Creditors (CoC) which is lower than liquidation value in quantitative terms.


Resolution Plan should typically mirror the Insolvency and Bankruptcy Code, 2016 (Code) objectives in maximizing the value. The Code, the way it is derafted, puts all its faith in the Committee of Creditors (CoC) in protecting the commercial interest of stakeholders of the corporate debtor while they determine the feasibility and viability of the rival plans placed before them. Maximization of value probably weighs prominently on the minds of collective wisdom of the CoC while they carry the burden of expectations from other stakeholders. It is a tough job. It is about making a difficult choice keeping everyone’s faith intact while ensuring that maximum recoveries are made for their dues as well while the corporate debtor gets a chance to be rehabilitated.

The job of CoC is hard enough to select the suitable resolution plan amongst the available ones. The hardest part surfaces when a resolution plan lower than the liquidation value is received. No one would want to be in that position for taking a call either to approve or reject such a plan as it affects everyone and allegations are likely to fly thick and fast, if such a plan is approved.

Resolution Plan lower than Liquidation Value

One question that begs answers is whether the CoC can consider and approve a plan which is lower than the liquidation value? On the face of it, such an approval looks incongruous as it would seem as defeating the interest of stakeholders while upsetting the objectives of the Code. Practicalities apart, does the provisions of Code in any way bar the CoC to approve such a plan? The Apex Court had the occasion to examine this aspect in Maharashtra Seamless Limited vs. Padmanabhan Venkatesh & Ors[1] particularly whether the scheme of the Code contemplates that the sum forming part of the resolution plan should match the liquidation value or not. In this case, NCLAT has directed that amount in resolution plan should match the liquidation value and this was challenged before Supreme Court. 

The Supreme Court noted that that “the object behind prescribing such valuation process is to assist the CoC to take decision on a resolution plan properly. Once, a resolution plan is approved by the CoC, the statutory mandate on the Adjudicating Authority under Section 31(1) of the Code is to ascertain that a resolution plan meets the requirement of sub-sections (2) and (4) of Section 30 thereof.” The Court further opined that the Appellate Authority has proceeded on equitable perception rather than commercial wisdom. The Court felt that “the Court ought to cede ground to the commercial wisdom of the creditors rather than assess the resolution plan on the basis of quantitative analysis.” While recognizing the primacy of commercial wisdom of the CoC, the Apex Court rejected the idea of matching the value of the resolution plan to the liquidation value.

In another judgment[2] rendered on 28th February, 2020, the Apex Court has relied upon the Maharashtra Seamless judgment and set aside the judgment of NCLAT whereby the matter was remitted to NCLT after finding that Section 30(2) of the Insolvency and Bankruptcy Code together with the principle of maximization of assets of the corporate debtor, a resolution plan which is lesser than liquidation value cannot be accepted. The Supreme Court held that since this issue has been decided in Maharashtra Seamless judgment, the Appellate Tribunal cannot reject resolution plans approved by the CoC, which are lower than liquidation value. 

Conclusion

There is no provision in the Code that justifies a view that resolution plans should carry a value higher than liquidation value. A closer look of the provisions tells us that the Resolution Applicant is not aware of the liquidation value as determined by the Registered Valuers though they may have their own assessment of value. In fact, CoC members also do not know the liquidation value unless the resolution plans are placed before them. Liquidation value, at the most, works as a guidance for the CoC; it cannot be considered as a benchmark and resolution plans offering lower value than liquidation value ought not to be rejected on this ground alone. Of course, the resolution plan must pass the test of feasibility, viability and must be implementable besides satisfying the legal provisions. New lessons are being learnt everyday.


[1] Civil Appeal No. 4242 of 2019 decided on 22nd January, 2020.

[2] State Bank of India vs. Accord Life Spec Private Limited, Civil Appeal No. 9036 of 2019.

4 Critical Questions Relating to Avoidance Transactions in Voluntary Liquidation


The law relating to voluntary liquidation has been moved from the Companies Act, 2013 (or erstwhile Companies Act, 1956) to Insolvency and Bankruptcy Code, 2016 (Code or IBC). Voluntary liquidation is the option available to solvent corporate persons having committed no default. The voluntary liquidation, interalia, requires a special resolution of the members of the company and approval of such resolution by the creditors representing two-thirds in value of the debt of the company within seven days of special resolution.

Liquidation Commencement Date 

The Adjudicating Authority is not involved at this stage of voluntary liquidation and with no order of liquidation necessary, the date of passing of special resolution by the members of the company is considered as the liquidation commencement date[1]. The Adjudicating Authority comes into picture after the affairs of the company have been completely wound up when the liquidator is under an obligation to make an application to the Adjudicating Authority for dissolution of the company[2]. The voluntary liquidator may, however, approach the Adjudicating Authority during the liquidation process in case of non-cooperation of personnel of the company or for determination of any question of law or fact.

Applicability of Section 35 to 53 of Liquidation Process

For conducting the voluntary liquidation, no separate process has been provided in the Code. The Code provides for adoption of liquidation process from sections 35 to 53 with such modifications as may be necessary[3]. Equally the provision of cooperation of personnel of the company provided in CIRP process apply to voluntary liquidation process[4]. The liquidation process chapter contains sections from 33 to 53. Section 33 provides for initiation of liquidation of a corporate debtor which has undergone the process of Corporate Insolvency Resolution Process (CIRP). Section 34 provides for appointment of the liquidator and fee to be paid. Logically these two sections have no applicability to the voluntary liquidation process as no order of Adjudicating Authority is required and the fee of voluntary liquidator gets decided by the members appointing the liquidator. But rest of them apply with necessary modifications.

4 Critical Questions Remaining Unanswered relating to Avoidance Transactions

So far so good but applicability of sections 43 to 51 dealing with avoidance transactions leaves following 4 questions unanswered: –

  1. Is it incumbent upon the voluntary liquidator to identify and determine the avoidance transactions and make application to the Adjudicating Authority?  
  2. If yes, what will be the starting point of look back period?
  3. Is it possible to dissolve the company while avoidance applications are pending for adjudication?
  4. What will be the treatment of any recoveries made out of avoidance transactions?

First Question: Is it incumbent upon the voluntary liquidator to identify and determine the avoidance transactions and make application to the Adjudicating Authority?  

Plain reading of section 59(6) with conjunctive reading of avoidance transactions sections from sections 43 to 51 suggests that it is incumbent upon the liquidator appointed for voluntary liquidation to form an opinion and make a determination to identify the transactions under sections 43, 45, 49 and 50 of the Code. The use of the word liquidator in avoidance transaction sections includes the liquidator appointed for voluntary liquidation and hence the liquidator is under a duty to determine the avoidance transactions and file appropriate applications before the Adjudicating Authority. A crucial question relates to payment of fee of forensic auditor, if appointed by the liquidator. Who pays it? Can the liquidator claim it as part of liquidation cost? The answer to this pertinent question depends on negotiated fee of the voluntary liquidator. No separate fee can be charged if the liquidator has not factored it in the negotiated fee. In other words, if negotiated fee provides for separate payment to be made for this effort, then it may be charged, else the voluntary liquidator will have to bear expenses of this effort out of his/her fee.

Second Question: If yes, what will be the starting point of look back period?

This question has no straight answer and it calls for application of interpretation rules. All the relevant sections dealing with avoidance transactions, namely, sections 43, 45, 49 and 50 provide the starting point of look back period as insolvency commencement date. In voluntary liquidation, there is no insolvency commencement date as it is not a consequential step arising out of CIRP process. The voluntary liquidation, as we are aware, is meant for solvent companies with no default and hence there is no question of CIRP process. The look back period for avoidance transactions is as under:

SectionNature of TransactionLook Back Period for non- related party transactionsLook Back Period for related party transactions
43Preferential Transaction1 year prior to insolvency commencement date2 years prior to insolvency commencement date
45Undervalued Transaction1 year prior to insolvency commencement date2 years prior to insolvency commencement date
49Transactions defrauding creditorsNo look back periodNo look back period
50Extortionate Credit Transactions2 years prior to insolvency commencement date2 years prior to insolvency commencement date

In all cases of avoidance transactions, the look back period is to be determined with reference to insolvency commencement date. In CIRP process and possible consequential liquidation of the corporate debtor, there is an insolvency commencement date and it can be the reference point.  But for the purposes of voluntary liquidation, insolvency commencement date is irrelevant as it is not a process arising out of or as a result of CIRP process.

Literal application and construction of these avoidance transaction provisions in the context of voluntary liquidation is leading to absurdity. The literal construction has, thus, to be eschewed and the phrase insolvency commencement date has to be construed in accordance with the context. The text and context must match. Here being a mismatch, the interpretation is necessary. We need to apply golden rule of interpretation. When literal interpretation leads to an irrational result that is unlikely to be the legislature’s intention, a departure can be made from literal meaning. A preferred meaning can be chosen. 

In voluntary liquidation, there is non-existence of insolvency commencement date. There exists only the liquidation commencement date. Hence, insolvency commencement date should be read as liquidation commencement date for the purposes of construing look back period and for determination of avoidance transactions in voluntary liquidation process. This interpretation gets strength from Section 59(6) which makes provisions of sections 35 to 53 of liquidation process applicable to voluntary liquidation with such modifications as may be necessary. Replacement of insolvency commencement date with liquidation commencement date for the purpose of construing look back period for avoidance transactions partakes the character of ‘necessary modification’ being reasonable, judicious and rational . Even the purposive approach of interpretation can be applied. The purpose of determining avoidance transactions is to provide equitable treatment to the creditors as provided in section 53 of the Code. The transactions carried out by the erstwhile management are put under the lens. From the insolvency commencement date, it the insolvency professional who takes control of the management and affairs of the company. Prior to the insolvency commencement date, the company remains under the control of erstwhile management and it is imperative to identify avoidance transactions. Hence the cut-off date for look back period is the insolvency commencement date. In voluntary liquidation, the liquidator assumes control over the company and its assets from the liquidation commencement date. Prior to this date, it is the management of the company which remains in charge of the affairs of the company and the possibility of avoidance transactions cannot be ruled out.  To conclude, in voluntary liquidation, the cut off date for look period would be liquidation commencement date instead of insolvency commencement date.

Base upon the interpretation, the look back period for avoidance transactions under voluntary liquidation should be considered as follows:

SectionNature of TransactionLook Back Period for non- related party transactionsLook Back Period for related party transactions
43Preferential Transaction1 year prior to liquidation commencement date2 years prior to liquidation commencement date
45Undervalued Transaction1 year prior to liquidation commencement date2 years prior to liquidation commencement date
49Transactions defrauding creditorsNo look back periodNo look back period
50Extortionate Credit Transactions2 years prior to liquidation commencement date2 years prior to liquidation commencement date

Third Question – Is it possible to dissolve the company while avoidance application/s is/are pending for adjudication?

In the context of liquidation process, this question is easy to answer. Regulation 44(1) of the Liquidation Regulations reads as under: 

“The liquidator shall liquidate the corporate debtor within a period of one year from the liquidation commencement date, notwithstanding pendency of any application for avoidance of transactions under Chapter III of Part II of the Code, before the Adjudicating Authority or any action thereof.”

Conjunct reading of Regulation 44(1) of the Liquidation Regulations with Form H, where details of pending avoidance application are to be stated, it can be concluded that regardless of pendency of the applications for avoidance transactions, the company can be dissolved by the Adjudicating Authority after completing all other activities under liquidation.

One is persuaded to apply the same rational to voluntary liquidation and arrive at the same conclusion. Before it is done, let us consider Regulation 38(b)(iii) of Voluntary Liquidation Regulations, which reads as under: 

“38 (1) On completion of the liquidation process, the liquidator shall prepare the Final Report consisting of – 

xxxxx

(iii) No litigation is pending against the corporate person or sufficient provision has been made to meet the obligations arising from any pending litigation.”

xxxxx  

This Regulation has caused confusion as in the final report, the liquidator has to make an affirmative statement that no litigation is pending. If avoidance application is pending for adjudication, the liquidator cannot make this kind of affirmative statement as pending avoidance application is in the nature of a pending litigation. The Bankruptcy Law Reforms Committee Report, which happens to be the genesis of the Code, dealt with distribution of realization made on account of avoidance transactions. It is useful to reproduce relevant portion of Para 5.5.7:

“The Committee recommends that all transactions up to a certain period of time prior to the application of the IRP (referred to as the “look-back period”) should be scrutinized for any evidence of such transactions by the relevant Insolvency Professional. The relevant period will be specified in regulations. At any time within the resolution period (or during the Liquidation period if the entity is liquidated) the relevant Insolvency Professional is responsible for verifying that reported transactions are valid and central to the running of the business. There should be stricter scrutiny for transactions of fraudulent preference or transfer to related parties, for which the “look back period” should be specified in regulations to be longer.

The Code will give the Liquidator the power to file cases for recovery. Some jurisdictions set such recoveries aside for payment to the secured creditors. Given the extent of equity financing in India, all recoveries from such transactions will become the property of the trust, and will be distributed as described within the waterfall of liabilities.”

The BLRC recommended formation of trust for recoveries made through vulnerable transactions (termed as avoidance transactions in the Code). The BLRC preferred providing discretion power to the Adjudicating Authority to close liquidation case inspite of the fact that application for recovery from the vulnerable transactions is pending. Relevant extract of Para 5.5.10 from BLRC Report is reproduced hereunder: 

“The Liquidator may apply to the Adjudicator to close down the case with estimates of the time to recovery and possible value of recovery from the vulnerable transactions. If the Adjudicator rules in favour of the application, an order to close the Liquidation case will be issued. This will trigger a set of accompanying orders as follows:

1. An order to the relevant registration authority to remove the name of the entity from its register.

2. An order releasing the Liquidator from the case.

3. An order to submit all records related to the case to the Regulator.

If the Adjudicator does not rule in favour of the application, the Liquidation case remains open. The Code permits the Liquidator to apply for the closure again after a reasonable period of time has passed.”

Coupled with the recommendation of the BLRC and the provisions contained in Liquidation Regulations, it can be safely concluded that the principle applicable for liquidation can be applied in voluntary liquidation cases. There is no justification as to why a different treatment should be afforded in case of voluntary liquidation. In so far as Regulation 38(1)(ii) is concerned, the liquidator can mention in Final Report that no litigation is pending except application for avoidance transactions. It is left to the discretion of Adjudicating Authority to decide whether to close the liquidation or to keep it open till the final decision in these applications is made.

Fourth Question: What will be the treatment of any recoveries made out of avoidance transactions?

This aspect has not been dealt in by the Code or the Regulations framed thereunder. However, relying upon the suggestions of the BLRC (relevant extract reproduced hereinabove), it is judicious to distribute the recoveries made in accordance with the distribution waterfall under section 53 of the Code.

Epilogue

The conclusion to each question has been stated hereinabove adopting interpretative approach. It is fair to expect a suitable amendment in the Code and Regulations framed thereunder to set at rest any doubt and interpretative difficulties that are likely to arise amongst the benches of the Tribunal and Appellate forums while dealing with these pertinent questions. 


[1] Section 59(5) read with section 5(17) of the Insolvency and Bankruptcy Code, 2016 

[2] Section 59(7) of the Insolvency and Bankruptcy Code, 2016 

[3] Section 59(6) of the Insolvency and Bankruptcy Code, 2016 

[4] Section 19(3) of the Insolvency and Bankruptcy Code, 2016