Edelweiss Asset Reconstruction Company Limited vs Mr. Anuj Jain & Anr.

Per: H.V. Subba Rao, Member (Judicial)

The above application is filed by the Edelweiss Asset Reconstruction Company Limited, applicant herein under Section 60(5) seeking following reliefs:

The submissions of the Applicant are as follows:

The present Application is being filed by “Edelweiss Asset Reconstruction Company Limited” (“Applicant”). The Respondent No. 1 herein is Mr. Anuj Jain, the Resolution Professional (“Respondent No. 1”/”RP”) and the Respondent No. 2 is the Committee of Creditors of the Corporate Debtor (“CoC”) i.e. Ballarpur Industries Limited (“Corporate Debtor”). The RP Was duly appointed by this Hon’ble Tribunal vide Order dated 27.05.2020 Replacing the erstwhile Interim Resolution Professional (IRP), Mr. Divyesh Desai.

The Applicant has filed the captioned Application primarily to seek relevant directions of this Hon’ble Tribunal to declare the revised Resolution Plan submitted by Finquest Financial Solutions Private Limited (“Finquest”)as illegal and blatantly contrary to the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”), as Finquest is clearly ineligible and barred as a Resolution Applicant in terms of Section 29A of the IBC.

By way of the present application, the Applicant has highlighted the glaring violations of the IBC and this Hon’ble Tribunal’s order by the Respondents to suit the vested interest of the Resolution Applicant i.e. Finquest Financial Solutions Private Limited. By virtue of this illegal revised Resolution Plan of Finquest, the exclusively charged asset is on the verge of being sold pursuant to a Public Notice dated 03.05.2022 issued by the Respondent No. 1/ RP in terms of the said plan whereby the proceeds will be solely distributed amongst the financial creditors/members of CoC, to the detriment of the Applicant/ Secured Creditor, causing severe financial loss and such an act is in violation of the settled position of law by the Hon’ble Supreme Court in the judgment of Jaypee Kensington Boulevard Apartments Welfare Association & Ors. Vs. NBCC (India) Ltd. & Ors. (Civil Appeal No. 3395 of 2020), whereby it has been held that rights of secured creditors (who are not financial creditors) cannot be extinguished under a resolution plan by way of reliefs and concessions and such secured creditors would have to be paid in accordance with the value and priority of security held by them, or their security interest would need to be discharged in accordance with principles of law relating to discharge of security interest. Therefore, the immovable property exclusively charged in favour of the Applicant cannot be extinguished by way of sale in terms of the said revised Resolution Plan of Finquest.

Therefore, specific orders are sought by the Applicant from this Hon’ble Tribunal for prohibiting the sale of the Immovable Property exclusively charged in favour of the Applicant, which is sought to be sold/disposed in terms of the said revised resolution plan which has been illegally presented, considered and approved by the CoC/ Respondent No. 2, despite the passing of the liquidation order in respect of the Corporate Debtor by this Hon’ble Tribunal dated 25.01.2022. Consequently, the Applicant also seeks from this Hon’ble Tribunal to pass the order for liquidation of the Corporate Debtor, as per the IBC.

In terms of the present application, the Applicant would like to disclose all relevant facts and act as the whistle blower on the arbitrary and unlawful conduct of the RP and the CoC, in collusion with Finquest, while conducting the corporate insolvency resolution process (“CIRP”) of the Corporate Debtor. Hence, the present application.

Submission of Respondent No.1 are as follows:

At the outset, Respondent No.1 i.e. The Resolution Professional submits that contentions and averments raised in the Application, unless specifically admitted in the following paragraphs, may kindly be deemed to have been specifically traversed and denied.

The Respondent no. 1 further submits that the present application is liable to be rejected for non-joinder of necessary party. It is a settled position that necessary party is the person who ought to be joined as party and in whose absence an effective order cannot be passed by the court.

The Respondent submitted that general rule as regards impleadment of parties is that an applicant or a petitioner or a plaintiff, being dominus litis is entitled to array such parties as respondents against whom such applicant/petitioner/plaintiff desires to pursue the legal action. However, it is trite law that non-joinder of necessary party (such as Finquest in the present application) can be fatal to the proceedings. In this regard, reliance is placed upon the following precedents of the Hon’ble Supreme Court:

In light of the above, it is evident that the present Application suffers from vice of non-joinder of necessary party (i.e., Finquest) and therefore, the instant application is liable to be dismissed on this ground alone.

Hon’ble Appellate Tribunal and this Hon’ble Tribunal.

It is most humbly submitted that the submission made by the Applicant with regards to consideration of the Revised Resolution Plan beyond the expiry of the CIRP timelines are erroneous and misconceived. It is respectfully submitted that the Hon’ble National Company Law Appellate Tribunal (“Appellate Tribunal”) vide its order dated 19.04.2022 (“NCLAT Order”) passed in Company Appeal (AT) (Insolvency) No. 227 of 2022 was pleased to extend the CIRP period till 30.04.2022. The relevant excerpt of the NCLAT Order has been reproduced hereunder:

It is respectfully submitted that the RP had filed the Application for approval of Revised Resolution Plan (“Plan Approval IA”) before this Hon’ble Tribunal on 28.04.2022 under diary number 2709138/ 02390/ 2022. Evidently, even the Plan Approval IA had been filed by the RP, 2 days prior to the expiry of the CIRP timeline as set out in the NCLAT Order (i.e., 30.04.2022). Hence, the allegations of the Applicant as regards violations on part of the RP on account of receiving and considering the Revised Resolution Plan beyond the expiry of the CIRP timeline deserve to be rejected on this ground alone.

Subject to outcome of IA no. 496/2021 filed by the RP under Section 45 of the IBC against the Finquest, it is most respectfully submitted that the averments of the Applicant in respect of Finquest being ineligible under Section 29A of the IBC are untenable as on date. It is respectfully submitted that the Applicant has raised frivolous issues based on mere conjectures and surmises. In this regard it is pertinent to mention that Securities Exchange Board of India (“SEBI”) vide its order (“SEBI Order”) prohibited connected person(s) of Finquest from trading in securities. The said SEBI’s Order was challenged before the Hon’ble Securities Appellate Tribunal, Mumbai (“SAT”) in Appeal No. 154 of 2020 titled as Bharat J. Patel & Ors. vs. Securities & Exchange Board of India. The Hon’ble SAT vide order dated 08.09.2020 was pleased to quash the SEBI Order. The relevant excerpts of the order dated 08.09.2020 have been extracted hereunder:

d. Further, it is humbly submitted that the Respondent No. 1 had assessed the eligibility of Finquest under Section 29A of the IBC on two occasions through two different entities. Initially, RP had engaged an independent consultant i.e., BDO Valuation Advisory LLP (“BDO”) to assess the eligibility of Finquest under Section 29A. BDO has provided its report (concluded on 19.09.2021) confirming that Finquest is not ineligible under Section 29A. Subsequently, when the Revised Resolution Plan was submitted, the same was to be read with the annexures previously submitted by Finquest with the resolution plan dated 21.05.2021. Hence, as a prudent measure the ineligibility under Section 29A was re-checked by the RP before placing the Revised Resolution Plan before the CoC. RP had appointed Pipara & Co LLP (“PCO LLP”) to re-assess the eligibility of Finquest under Section 29A. PCO LLP has provided its report (concluded on 21.03.2022) confirming that Finquest is not ineligible under Section 29A to submit the Revised Resolution Plan for the Corporate Debtor. For the sake of brevity, the respective reports submitted by BDO and PCO LLP have not been placed on record, however, RP craves liberty to place the above said reports on record if deemed necessary or directed by the Hon’ble Tribunal.

e. It is respectfully submitted that in light of the above, it is evident that the Applicant has made misconceived averments which are based on falsehood, with the ulterior intention of deceiving this Hon’ble Tribunal so as to declare Finquest as ineligible under Section 29A(f). Hence, contention of the Applicant as regards Finquest being ineligible under Section 29A(f) deserve to be rejected.

f. RP has not extinguished the exclusive charge of the Applicant over the Immovable Assets.

It is humbly submitted that before delving into the intricacy of this issue, it is imperative to understand the factual background in this regard. On 05.02.2020, Applicant had submitted its claim (“Form C”) amounting to Rs. 133.24 Crores to the Respondent. The said claim was in connection with a loan granted by Yes Bank (Applicant has acquired loan from Yes Bank) to Corporate Debtor’s affiliate company (“Loan”), namely BILT Graphic Paper Products Limited (“BGPPL”). Corporate Debtor had mortgaged its immovable assets i.e., Immovable Assets as security for the Loan availed by BGPPL. Additionally, the Corporate Debtor had also furnished a corporate guarantee as security for the Loan. The Loan was assigned subsequently to Applicant by Yes Bank along with the security interest.

It is humbly submitted that since there was no default by BGPPL in the underlying financial facilities, the corporate guarantee provided by the Corporate Debtor was not invoked. Therefore, the RP admitted the claim of Applicant at notional value of Re. 1/-under the category of “Other Creditors/secured creditor”. The said corporate guarantee has not been invoked till date.

In this context it is relevant to highlight that the Revised Resolution Plan seeks to extinguish the security of Applicant on the Immovable Assets [reference is invited to clause 4.13.1(a)(iii) of the Revised Resolution Plan]. Further, the Revised Resolution Plan proposes for sale of Immovable Assets along with certain other assets of the Corporate Debtor at an estimated amount of Rs. 277 Crores [reference is invited to clause 4.6.2.4 of the Revised Resolution Plan]. As per the Revised Resolution Plan, the abovementioned amount of Rs. 277 Crores will be paid to the Financial Creditors of the Corporate Debtor through appropriation towards the redemption of NCDs issued to the said Financial Creditors [reference is invited to clause 4.6.2(b)(i)(3) and note to clause 4.6.2.4(d) of the Revised Resolution Plan].

It is pertinent to mention that, the RP has admitted the claim of Applicant at the notional value of Re. 1/- under the category “Other Creditors/secured creditor” and Applicant is not a “Financial Creditor” of the Corporate Debtor. Therefore, as per the existing framework of the Revised Resolution Plan, it appears that the Applicant will not be entitled to receive any amount from the sale of Immovable Assets, however, the Applicant’s security over the Immovable Assets will be extinguished.

In this regard, it is most respectfully submitted that the issue regarding extinguishing security interest of a third party (which is not directly related to a corporate debtor) through a resolution plan is yet to tested before the Hon’ble Tribunal Adjudication or any other forum. The Applicant has relied upon decision of the Apex Court in the case of Jaypee Kensington Apartments v. NBCC & Ors. [Civil Appeal No. 3396 of 2020] (“Jaypee Case”) to state that the exclusive charge of Applicant cannot be extinguished. It is pertinent to the point out that in facts of the Jaypee Case, the default with respect to the security which was sought to be extinguished had occurred whereas in the present case there is no default by BGPPL in the underlying financial facilities, the corporate guarantee provided by the Corporate Debtor has not been invoked.

It is most respectfully submitted that in the prima facie opinion of the RP, in view of the Jaypee Case, the issue regarding extinguishing security interest of the Applicant in relation to Loan given to a group company after payment of certain consideration is yet to be settled by judicial authorities. The above said position was duly intimated to the CoC vide compliance report dated 22.03.2022. Thereafter, the said issue was considered by the CoC while evaluating the issue of distribution of proceeds of sale of Immovable Assets among the stakeholders and while assessing the commercial feasibility/ viability of the Revised Resolution Plan before voting upon the Resolution Plan.

At this stage, it is apposite to highlight the recent judgment dated 05.04.2022, passed by the Hon’ble Appellate Tribunal in Company Appeal No. 371 of 2022 titled as Shravan Kumar Vishnoi vs Upma Jaisawal & Ors. (“Upma Jaiswal Case”). In Upma Jaiswal Case, the Hon’ble Appellate Tribunal has held that the RP cannot act as gate keeper and prevent resolution plans from being placed before the CoC for its consideration. The RP is merely required to form an opinion and the ultimate decision to accept or reject a resolution plan vests with the CoC. The relevant excerpts have been extracted hereunder:

Therefore, in alignment with the ratio laid by the Hon’ble Appellate Tribunal in Upma Jaiswal Case, the RP highlighted the abovementioned issues in its compliance report dated 23.03.2022 and the same placed for consideration of the CoC prior to the voting on the Revised Resolution Plan.

In addition to the above, the submission of the Applicant with respect to Applicant being coerced into bearing the security charges of INR 4 Lakhs, it is respectfully submitted that owing to acute financial conditions faced by the Corporate Debtor, all options to protect the assets of the Corporate Debtor were being explored by the Applicant under the supervision of CoC. Hence, with a view to protect the Immovable Assets, the Applicant was asked if security charges of INR 4 Lakhs would be funded by the Applicant. It was highlighted that amount paid by the Applicant forms part of the CIRP cost. Hence, the cost incurred by the Applicant shall be reimbursed to the Applicant in priority to all other disbursements as provided under the Revised Resolution Plans.

In view of the foregoing, it is submitted that Application filed by the Applicant has become infructuous as the CIRP of the Corporate Debtor has failed. Therefore, it is most respectfully prayed that the reliefs sought by the Applicant in the instant Application may be denied and the same may be dismissed. The RP craves liberty to file detailed reply on merits if so deemed necessary by this Hon’ble Tribunal, which such contentions are not raised herein at this stage for the sake of brevity.

Heard Mr. Zal Andjyarujina counsel appearing for the Applicant and Mr. Pradeep Sancheti counsel appearing for the Respondent No.1/ Resolution Professional and Mr. Ankur Mital counsel appearing for the Respondent No.2/ Committee of Creditors and perused the material available on records.

After hearing both the sides and upon perusing material available on record, this bench notes that on 05.02.2020, Edelweiss submitted its claim amounting to Rs. 133.24 crores to the RP. The said claim was in relation to loan granted by Yes Bank to to Corporate Debtor’s affiliate company, namely BILT Graphic Paper Products Limited (“BGPPL”). Further the bench observes that the Corporate Debtor i.e., Ballarpur Industries Limited (“BILT”) had mortgaged Chowdhwar Land as security for the Loan availed by BGPPL and additionally, the Corporate Debtor had also furnished a corporate guarantee dated 22.06.2016 as security for the loan availed by BGPPL. Subsequently, by way of Assignment Agreement dated 30.09.2017, Yes Bank assigned the Loan (along with the security interest) to Edelweiss. Notably, BGPPL has not defaulted in re-servicing of the Loan and the corporate guarantee provided by BILT has not been invoked by Edelweiss (Applicant herein) till date.

It is not wrong to conclude that the financial exposure of the Applicant herein is absolutely safe since no default has occurred till date and the associate Company i.e BGPPL seems to be sound to continue servicing of the loan. It is a settled position of law that whenever any security interest is created by a borrower in favour of a lender inorder to secure the loan granted by the lender and such security for any reasons suffers depreciation and or is extinguished then in such circumstances the Lender can seek for creation of additional security from the Borrower (BGPPL in the present case). Applying the same principle here we observe that the CoC in its commercial wisdom has rightly decided to deal with the assets of the Corporate Debtor in the manner as decided in the Revised Resolution Plan and has rightly decided to distribute the proceeds of sale of the assets to the Financial Creditors of the Corporate Debtor as per the Revised Plan.

The Bench further observes that the RP has admitted the claim of Edelweiss/Applicant at Notional value of Re. 1/- under the category of “Other Creditors/ Secured creditor” and the said decision of the RP has not being challenged by the Applicant. It is undisputed that no default is committed by the BGPPL in servicing its loan and thus no amount of default can be calculated and in fact the claim of the Applicant to the RP in the Form C seems to be pre mature. The Bench observes that for a claim to have been filed by the Applicant a default should have occurred and a default amount should have been arrived at. However, since no default has occurred the Applicant has no cause of action to proceed against BGPPL and thus has no cause of action to proceed against the security created in favour of Applicant in the assets of the Corporate Debtor. Even if we desire to consider the right of the Applicant then the same shall be restricted to the Notional value of Re. 1/- and as far as the expenses incurred by the Applicant to the amount of Rs. 4 lakhs is concerned, the CoC has fairly decided to reimburse the same to the Applicant. Thus, we do not find that the decision of the CoC suffers from any material defect which calls for our intervention. Without interfering much into the said decision of the CoC we conclude that the rights of the Applicant will arise only on default by the BGPPL and only on such default the Applicant can exercise its rights. At the moment the Applicant can remedy any such condition by seeking additional security from the BGPPL since the assets of the Corporate Debtor is already dealt with in the revised Resolution plan which is approved by the required majority.

To buttress their argument the Applicant has relied upon Jaypee Kensington Boulevard Apartments Welfare Association & Ors. vs. NBCC (India) Ltd. & Ors. (Civil Appeal No. 3395 of 2020) (“Jaypee Case”). and India Resurgence ARC Private Limited vs. Amit Metaliks Limited & Anr. [2021 SCC Online SC 409] (“Amit Metaliks Case”).

Before delving into ratio/ observations of Jaypee Case and Amit Metaliks Case, it is imperative to highlight that the statutory framework of IBC mandates for a resolution plan provide for measures relating to modification/ satisfaction of security interest. In this regard, Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) is extracted hereunder:

Given the above, we are satisfied that the contention of Edelweiss that the Final Plan cannot deal with the security interest of Edelweiss without prior consent is totally misconceived.

The Applicant has further contended that RP has challenged applicability of Jaypee Case on the fact that there is no default on part of principal borrower. Further, the Applicant has contended that occurrence of default and invocation of Corporate Guarantee has no nexus with right of Secured Creditor pursuant to the Jaypee Case. To deal with the same we have perused the Jaypee Case and we are of the view that the Jaypee Case does not state that a resolution plan cannot deal with the security interest of the Applicant without prior consent of the secured creditor. In the Jaypee Case, the findings of Hon’ble Supreme Court were anchored upon the fact that a security interest which was not even taken up as a part of CIRP cannot be extinguished ipse dixit. Relevant excerpt is as under:

Further, in Jaypee Case, the Supreme Court did not accept the manner in which the security interest was being dealt within the resolution plan. The reason for such non-acceptance was that on one hand the security interest was not considered during the CIRP, whereas, on the other hand, the resolution plan plainly sought to annul the security interest without any specific clause on treatment of the security interest. Relevant excerpt is as under:

Considering the above, it emerges that a Security Interest which has duly been included/ considered as a part of CIRP can be specifically dealt with under the resolution plan without seeking any consent from the relevant Secured Creditor. In the present case at hand the security interest over the Chowdhwar Land has been duly considered and assessed by the RP. In fact Post verification of Form C filed by Edelweiss, the RP has admitted the claim filed by Edelweiss at notional value of Re. 1/- and has placed the Applicant in the category of Other Creditors. We further observe that the said treatment provided by the RP was not been challenged by the Applicant at the relevant stage. Hence, the Final Plan accordingly provides for a treatment to the claim filed by Applicant in CIRP of BILT. Thus it is evident that the findings of the Jaypee Case cannot be simpliciter applied in the present case.

In facts of the Jaypee Case, the default with respect to the security which was sought to be distinguished had occurred whereas in the present case there is no default by BGPPL in the underlying financial facilities. Hence, the corporate guarantee provided by the Corporate Debtor has not been invoked. Since there are no amounts due and payable by BGPPL to the Applicant, allotment of any amount to the Applicant under the Final Plan would lead to an anomaly and unjust gain for the Applicant. The extinguishment of security interest of the Applicant is justified as the Resolution Applicant has to start on a clean slate. It is appropriate to mention here that the same principle of doctrine of clean slate has been upheld by the Hon’ble Supreme Court in Ghanashyam Mishra & Sons Pvt. Ltd. vs. Edelweiss Asset Reconstruction Company Ltd. [(2021) 9 SCC 657] (“Ghanashyam Mishra Case”).

The Hon’ble Supreme Court in the matter of India Resurgence ARC Pvt. Ltd. Vs. Amit Metaliks Limited [2021 SCC OnLine SC 409] wherein it is held that secured creditors cannot challenge resolution plan insisting the higher amount should be paid based on its security interest. Further, the Supreme Court has held that in the scheme of IBC, every dissatisfaction does not partake the character of a legal grievance and cannot be taken up a ground of appeal. The Supreme Court has further held that what amount is to be paid to different classes of subclasses or creditors in accordance with provisions of the Code and the regulated Regulations, is essentially the commercial wisdom of the Committee of Creditors, a dissenting Secured Creditor cannot suggest a higher amount to be paid to it with reference to the value of the security interest.

After listening to both the sides it is evident from the facts and the contentions raised from both the sides that the Resolution Plan was duly passed in the 26^th CoC Meeting held on 23.03.2022, which is passed by 88% of the CoC Members which is well above the required voting percentage of 66% as per the Code. Further, this Bench derives from the above contentions that the Corporate Debtor is acting as a guarantor on behalf of the Corporate Debtor’s affiliate company, which clearly shows that the Applicant is not a Financial Creditor to the Corporate Debtor, which makes the Applicant ineligible to raise objections to the Resolution Plan. And the Applicant wrongly relied on the judgement of Hon’ble Apex in India Resurgence ARC Pvt. Ltd. Vs. Amit Metaliks Limited whereas it has reaffirmed the supremacy of commercial wisdom of the CoC. Hence, the Applicant cannot raise objections to the approved Resolution Plan and is legally ineligible to file this Application. Therefore, this Bench finds no merit in admitting the above Interlocutory Application filed by the Applicant under Section 60(5) of the Code against the Resolution Professional and Committee of Creditors.

In view of the above observations and in the light of the case law discussed above, this bench is of the considered view that there is no merit in the above application filed by the Applicant and the same is liable to be rejected as devoid of merits.

Accordingly, the Interlocutory Application 1311/2022 is rejected and disposed of.