Kushal Ltd. vs Kartik Baldwa & Ors.

(Per Hon’ble Mr. Justice M. Satyanarayana Murthy)

All the three appeals have been filed aggrieved by the common order dated 24.03.2021 passed by Hon’ble National Company Law Tribunal, Ahmedabad Bench at Ahmedabad in Interlocutory Application Nos. 229, 230 and 231 of 2020.

After hearing the arguments of both the counsel, the Adjudicating Authority having come to the conclusion that the Appellants herein GITCO appointed by the Appellants did not calculate the capacity as per the formula for calculation of production capacity, calculated the capacity based on the report of GITCO and came to a conclusion that the capacity is equivalent to the production capacity as stated in Information Memorandum. As such the Resolution Professional did not make any misrepresentation, much less, fraudulent misrepresentation in Information Memorandum to invite expression of interest from the public, thereby no illegality is committed by CIRP. Finally, the adjudicating authority concluded that NCLT has no power to recall its own orders and none of rules and regulations under IBC or Rules of NCLT, 2016 permit to exercise such power. Rule 11 of NCLT, 2016 and Section 420 (2) of Companies Act, 2013 do not permit, recall of any order passed by the Adjudicating Authority, dismissed the petition.

Aggrieved by the order passed by the Adjudicating Authority, the present appeals are filed raising several contentions more particularly about the misrepresentation and fraudulent misrepresentation allegedly made by the Resolution Professional, while issuing Information Memorandum calling for expression of interest. In response to the invitation, the Appellants/Resolution Applicants submitted a resolution plan and addendum which was accepted by Committee of Creditors and approved by Adjudicating Authority by order dated 23.02.2019 in I.A. No. 224 of 2018.

It is specifically contended by the Appellants that dismissal of an application to recall the order passed by the Adjudicating Authority in I.A. No. 224 of 2018 on the ground that the Tribunal/ Adjudicating Authority cannot exercise power to recall its own order, as none of the provisions much less Rule 11 of IBC Rules, 2016 and Section 420 (2) of Companies Act, 2013 is erroneous ex-facie, in view of the law declared by the Hon’ble Apex Court. In support of their contentions, the appellants relied on the judgments of Hon’ble Supreme Court in United India Insurance Co. Ltd. vs. Rajendra Singh^{22.(2000) 3 SCC 581}; Roshan Deen vs. Preeti Lal^{33.(2002) 1 SCC 100}; Indian National Congress vs. Institute of Social Welfare^{44.(2002) 5 SCC 685}; Indian Bank vs. Satyam Fibres (India) Pvt. Ltd^{55.(1996) 5 SCC 550}; Deepa Gourang Murdeshwar Katre vs. Principal, V.A.V. College of Arts^{66.(2007) 14 SCC 108}; Revandas Ranchhodhbhai Rathod vs. Jyotiben Wd/o Rameshbhai Madhusudan Thakar^{77.2011 SCC online GUJ 2552}; Bindeshwari Pd. Chaudhary V. Debendra Pd. Singh^{88.AIR 1958 Patna 618}.

The Adjudicating Authority on erroneous appreciation of law arrived at such conclusion, on the ground that the Adjudicating Authority is not vested with power to recall its own orders.

It is further contended that the question of merger does not arise as the Appellants did not prefer any appeal before the Appellate Authority on the ground of misrepresentation or fraudulent misrepresentation made by Resolution Professional but filed appeal on different ground and the other aggrieved parties also preferred appeals before the Appellate Tribunal and Hon’ble Supreme Court, but the order was confirmed with certain modifications. Such order is not deemed to have been merged with the order and thereby, dismissal of the application of these Appellants on the ground of merger of the judgment of the Appellate Court into the judgment of Adjudicating Authority is erroneous and thereby, the approach of the Adjudicating Authority is illegal and placed reliance on the judgments of the Hon’ble Supreme Court in State of Madras vs. Madurai Mills Co. Ltd^{99.AIR 1967 SC 681}; Kunhayammed vs. State of Kerala^{1010.(2000) 6 SCC 359} and Khoday Distilleries Ltd. Vs. Shri Mahadeswara Sahakara Sakkare Karkhane Ltd^{1111.(2019) 4 SCC 376}

Yet, another contention of the appellants is that, on account of fraudulent misrepresentation, entire transaction is vitiated since the Resolution Professional did not exercise due diligence in issuing Information Memorandum which amounts to misrepresentation, thereby the submission of resolution plan which was approved by the Adjudicating Authority in I.A. No. 224/2018 is vitiated by fraudulent misrepresentation thereby the order is liable to be recalled, exercising inherent power by the Tribunal, but instead of exercising such power, dismissed the application erroneously and requested to allow the appeal, setting aside the order passed by the Adjudicating Authority.

During hearing, learned Counsel for the appellants requested for remanding the case to the Adjudicating Authority (National Company Law Tribunal, Ahmedabad Bench) with the direction to dispose of the applications, considering the law laid down by the Hon’ble Apex Court in various judgments referred above.

Learned counsel for the Respondents supported the impugned order totally and would contend that the order does not warrant any interference of this Court while exercising jurisdiction under Section 61 of IB Code, as the jurisdiction of the Tribunal under the IB code is summary in nature, since the adjudicating Authority exercised due diligence while issuing Information Memorandum based on the previous reports of Indian Agro & Recycled Paper Mills Association (IARPMA) and MITCON, and requested to dismiss the appeals.

Considering rival contentions, perusing the material available on record, the point that arises for consideration in Comp. App. (AT) (Ins.) No.681 of 2022 is:-

Indisputably, Rainbow Papers Limited filed an application to undergo process of the insolvency resolution and in that process Resolution Professional was appointed for completion of the insolvency resolution process. Later, he issued Information Memorandum inviting expression of interest from the public. In response to the Information Memorandum calling for expression of interest, the resolution applicants/appellants herein submitted their plan for resolution.

The Resolution Professional undisputedly issued the Information Memorandum calling for expression of interest dated 21.2.2018, disclosing the profile of Corporate Debtor in Annexure I, the same is extracted hereunder:

Though Annexure -1 is referred it was not filed. After 18 months from the date of approval of resolution plan by the Adjudicating Authority and after disposal of appeals filed by both Appellate Tribunal and the Hon’ble Supreme Court, the Appellant herein resorted to second round of litigation, filed petition on the ground that the CIRP made a false representation as to production capacity of the Corporate Debtor and on the basis of report of GITCO, the appellants herein filed the petition making serious allegation of fraudulent misrepresentation against the Resolution premises and thereafter submitted a report on conducting Professional.

The applicant got report made by GITCO with an object to find out the condition of plant and machinery etc. The team of GITCO consisting of technical experts inspected the detailed expert examination, the conclusions of GITCO are as follows:

The Rainbow Papers Ltd. is having adequate land and factory building. The infrastructure in the form of building and sheds is sufficient to support the projected production.

According to the report and as per Column No. III of the Information Memorandum, it is mentioned that the company profile document provided by the company show the installing capacity of the Corporate Debtor is 0.359 MTs is equivalent to 1.6% of Country Production Capacity.

Based on this Information Memorandum issued by the Resolution Professional, the Resolution applicants/appellants herein submitted their resolution plan and approved by COC and adjudicating authority, however, they got appointed GITCO for the purposes mentioned in the earlier paragraphs. The inspection was done unilaterally without the presence of CIRP or his representatives. However, the adjudicating authority calculated the production capacity based on GITCO report as follows:

As per the details mentioned above, the capacity was calculated by the Adjudicating Authority and found that the installing capacity as 5,21,911 MTs as shown in last column of the table.

Thus, the Tribunal on accessing the installing capacity i.e. the production capacity, the capacity of the industry of the Corporate Debtor, as mentioned in the Information Memorandum is equivalent to the capacity noted by GITCO after due inspection. Therefore, there is no misrepresentation, much less fraudulent misrepresentation.

The production capacity of Corporate Debtor as calculated by the adjudicating authority in the order under challenge was not questioned in the appeals by the Appellants in the present case. However, this Court while deciding this appeal under Section 61 of the IB Code need not undertake the process of calculating the production capacity of the Corporate Debtor.

Learned counsel for the Appellants in the written submission contended that the Appellants submitted resolution plan based on the information furnished by CIRP, submitted a resolution plan and addendum, at Clause (G), wherein, it is specifically stated that the resolution applicant submitted his resolution plan. However, I find no such clause in the addendum, but at Page No. 206 a specific mention is made as under:

The above extracted paragraph it is not relating to production capacity of the industry.

From the above, it is clear that, based on the Information Memorandum, the amount due to the financial creditors is arrived at, therefore, the contention of the Appellants that they submitted resolution plan based on the details as to production capacity of the industry is without any substance.

Another contention of the Appellants is that, pending tax proceedings are not disclosed in the Information Memorandum by CIRP, in fact, the CIRP disclosed the tax liability and the appellants at Point No. 51 of the resolution plan agreed as follows:

As the appellants themselves agreed to pay the future liability of taxes, non-disclosure of any pending cases as to assessment is not a ground. On the other hand, CIRP is under obligation to disclose pending cases but not the assessments. Hence, non-disclosure is not a ground to conclude that the CIRP made any misrepresentation.

In view of specific findings recorded by the Adjudicating Authority regarding the production capacity based on Information Memorandum and GITCO report, so also Point No.51 of resolution plan, it is difficult to accede to the request of the learned counsel for the Appellants.

‘Misrepresentation’ and ‘fraud’ are not defined in IBC. The word ‘Fraud’ is defined under Section 17 and ‘Misrepresentation’ is defined under Section 18 of the Indian Contract Act, 1872.

In the instant case, representation was made by the Resolution Professional in Information Memorandum inviting expression of interest. To constitute fraudulent misrepresentation, there must be material on record that CIRP has not exercised due diligence as a reasonable man and intentionally made such misrepresentation. But, no such material is place that misrepresentation was made intentionally, consequently failed to establish none of the ingredients to constitute misrepresentation or fraudulent misrepresentation.

To constitute a fraudulent misrepresentation, the appellant has to plead and prove that CIRP made such representation with an intent to deceive the Appellants herein and the petitioner would have suffered any damage.

In the present facts of the case, there is absolutely no allegation that the Resolution Professional made any representation with fraudulent intention or with an intent to deceive the resolution applicants i.e. appellants herein. In the absence of such allegation and proof of it, by producing prima facie material, it is difficult for this Court to accept the contention of the Appellants, that the appellants have submitted the resolution plan based on such fraudulent misrepresentation made by Resolution Professional.

At this stage it is relevant refer to the provisions of IBC, as referred by the appellants in the grounds of the appeal.

Section 18 (1) (a) of IBC deals with duties of interim resolution professional. The IRP has to:

Section 25 (2) (G) of IBC obligates the Resolution Professional to prepare the Information Memorandum in accordance with section 29, whereas Section 29 deals with preparation of information memorandum and the contents of information memorandum. The contents are as follows:

In the explanation annexed to Section 29, the word ‘relevant information’ is explained. It means the information required by the resolution applicant to make the resolution plan for the Corporate Debtor which shall include financial position of the Corporate Debtor. All information relating to dispute against the Corporate Debtor on any other matter pertaining to the Corporate Debtor as may be specified. Therefore, the word ‘relevant information’ referred in Section 29 (1) of IBC is only an information required by the resolution applicant i.e. appellants herein to make resolution plan for the Corporate Debtor. Here, the Resolution Professional disclosed the information based on the report of MITCON available and he is not an expert to make an assessment of the production capacity of the industry, therefore, he only disclosed those details regarding production capacity based on earlier report submitted by MITCON, such information is relevant for the purpose of making a resolution plan for the Corporate Debtor by the Resolution Applicant.

Thus, the Resolution Professional disclosed relevant information enabling the resolution applicants/ appellants to make appropriate application by submitting resolution plan for the Corporate Debtor. Such act would not amount to fraudulent misrepresentation.

Learned counsel for the Appellants also drawn the attention of this Court to Regulation Nos. 32, 36 (2) (a) which states about contents of Information Memorandum i.e. assets and liabilities with such description as on insolvency commencement date. The word ‘description’ includes the details such as cost of acquisition information useful like identification numbers, depreciation of charge etc., as per the explanation under Regulation 36 (2) (a). The contention of the Appellant is that the report was submitted for obtaining loans and it is confidential. Based on such report, disclosure of production capacity is impermissible. But this contention is not acceptable, for the reason that the report was submitted by MITCON to Corporate Debtor within reasonable time before commencement of insolvency resolution process. Thus, the CIRP made every endeavor to disclose the relevant information as required under law. The appellants themselves obtained a certificate from stock exchange and placed on record. Even according to the certificate, the production capacity of corporate debtor is same as mentioned in Information Memorandum, as such, the information disclosed by CIRP is based on material. Hence the finding of Tribunal cannot be interfered by this Appellate Tribunal.

Viewed from any angle, the Resolution Professional prima facie did make no misrepresentation or false representation, much less, fraudulent misrepresentation as alleged by the Appellants.

The Adjudicating Authority dismissed the application on the ground that the Adjudicating Authority has no power to recall its own order, which is prima facie erroneous, in view of the law laid down by the Apex Court in various judgments. At this stage, it is relevant to refer judgment of Apex Court in United India Insurance Co. Ltd. vs. Rajendra Singh^{1212.2000 ACJ 1032} where the Apex Court held that:

The same principle is reiterated in United India Insurance Co. Ltd. vs. Rajendra Singh; Roshan Deen vs. Preeti Lal; Indian National Congress vs. Institute of Social Welfare; Indian Bank vs. Satyam Fibres (India) Pvt. Ltd; Deepa Gourang Murdeshwar Katre vs. Principal, V.A.V. College of Arts; Revandas Ranchhodhbhai Rathod vs. Jyotiben Wd/o Rameshbhai Madhusudan Thakar^{1313.2011 SCC online GUJ 2552}; Bindeshwari Pd. Chaudhary V. Debendra Pd. Singh (referred supra).

We are not disputing the power of the Tribunal to recall its own order. The Tribunal held that it is not vested with the power to recall its own order on any ground but it is erroneous and therefore dismissal of the I.A. No. 230 of 2020 filed by these Appellants, on the ground that no such power is vested with the Tribunal is hereby set aside, while holding that Tribunal is competent to recall its own orders in view of the perspective pronouncements referred above.

The Adjudicating Authority also concluded that the order of primary Tribunal merged with the order of Supreme Court and NCLT.

No doubt, normally the order of the Appellate Tribunal will be merged with the order passed by the Tribunal etc. The fraud allegedly detected in year 2020 appointing GITCO for assessing the production capacity of Corporate Debtor company and by the time the appeals were filed by the Appellants, so no such fraud was detected and no findings were recorded by the Appellate Tribunal or the Supreme Court in the appeals filed by the other creditors.

‘Doctrine Of Merger’ was laid down by the Hon’ble Apex Court in State of Madras V. Madurai Mills Company Ltd^{1414.AIR 1967 SC 681}, wherein the Supreme Court held as follows:

The above principle is reiterated in Kunhayammed vs. State of Kerala^{1515.(2000) 6 SCC 359}; Khoday Distilleries Ltd. vs. Shri Mahadeswara Sahakara Sakkare Karkhane Ltd^{1616.(2019) 4 SCC 376}; A.V. Papayya Sastry vs. Govt. of AP^{1717.(2007) 4 SCC 221}; Vijay Shekhar vs. Union of India^{1818.(2004) 4 SCC 666}; Venture Global Engineering LLC vs. Tech Mahindra Ltd^{1919.(2018) 1 SCC 656}; Ganpatbhai Mahijibhai Solanki vs. State of Gujarat^{2020.2008 (3) SCALE 556}; Vijay Shekhar vs. Union of India^{2121.2007 (9) SCALE 442}, Venture Global Engineering LLC vs. Tech Mahindra Ltd.^{2222.(2018) 1 SCC 656}.

However, applying with principles laid down in the above judgments to the present facts of the case, we hold that dismissal of application of these appellants by the Tribunal on the ground of merger is erroneous, for the reason that, there was no challenge to the resolution plan approved by the Tribunal on the ground of misrepresentation or fraudulent misrepresentation.

In view of law laid down by the Apex Court in the judgements referred above, the dismissal of the application on the ground of lack of power to recall the orders and on the principle of doctrine of merger, the order of the Adjudicating Authority is liable to set aside, as it is ex facie erroneous. Accordingly, the findings are hereby set aside.

In any view of the matter, based on fact situation, more particularly about the calculation of production capacity by specific formula extracted above and for the failure of these appellants to inspect the premises before making expression of interest for submitting resolution plan indicates that the appellants are not diligent in submitting the resolution plan.

In Ebix Singapore Private Limited vs. Committee of Creditors of Educomp Solutions Ltd. and Anr^{2323.2021 SCC Online SC 707} and Kundan Care Products Ltd. vs. Amit Gupta etc^{2424.Civil Appeal No.3560 of 2020 dated 28.07.2021}, the Supreme Court considered the duties of Resolution Professional in para 185 with reference to Section 29 of IBC, BLRC report and the duties of Resolution Professional, held as follows:

Similarly, the Apex Court also adverted to UNCITRAL Guide notes, which is as follows:-

In para 189 of the judgment the Apex Court concluded that under the IBC, duty is cast upon a Resolution Professional to collect as much information about the Corporate Debtor as is accurately possible to him. Then, such information is communicated through an Information Memorandum. The Resolution Professional must be careful to clarify when its information is not comprehensive and what facts may cause change.

The word ‘relevant information’ is required under Section 29 to formulate its resolution plan. When once the Resolution Professional disclosed relevant material in Information Memorandum based on MITCON Report which is equivalent to the information collected by GITCO, which the Appellants relied on is sufficient to conclude that the Resolution Professional did make no misrepresentation or fraudulent misrepresentation, therefore, when the appellants failed to make necessary investigation in the matter and proceeded to submit its resolution plan, this the act of the Resolution Professional cannot be held to be the fraudulent misrepresentation. On the other hand, it appears that this application was filed after 18 months from the date of approval of resolution plan with an intention to delay the proceedings and to avoid resolution plan submitted by resolution applicants/appellants. If the contention of the Appellants is accepted at this belated stage and permitted the Tribunal to recall such orders after approval of the resolution plan by order of the Adjudicating Authority, it would amount to opening flood gates which would frustrate the very intention of IBC where timely resolution is required at every stage.

Therefore, for the reasons stated above, we find no ground to interfere with the order passed by the Adjudicating Authority in I.A. No. 230 of 2020 (NCLT, Ahmedabad Bench) and consequently the appeal deserves to be dismissed as the appeal is devoid of merits. Accordingly, Comp. App. (AT) (Ins.) No. 681 of 2022 is dismissed.

In Comp. App. (AT) (Ins.) No. 678 of 2022, the simple issue is about implementation of resolution plan by the Appellants.

This application was filed by the employees of Corporate Debtor to direct the Respondent to make payments due to the applicants forthwith and evolve mechanism to ensure that future payments are made and initiate action against the Respondent under Section 74 of code for willful contravention of resolution plan approved on 27.02.2019. The Tribunal allowed the petition; directed the respondent to implement the resolution plan forthwith and to pay the dues to the employees. The same is now challenged on the ground that the resolution plan was submitted due to misrepresentation made by interim resolution professional and therefore no direction be issued against the appellants herein.

In Comp. App. (AT) (Ins.) No. 681 of 2022, a specific finding is recorded by this Tribunal that no fraudulent misrepresentation was made by the CIRP and the CIRP had undertaken an exercise to calculate the production capacity of the industry and concluded that no fraudulent misrepresentation was made by CIRP while issuing Information Memorandum, calling for expression of interest.

As the application to recall the order passed by the Tribunal in I.A. No. 224 of 2018 was dismissed, the appellants are under obligation to implement the resolution plan. In fact, these appellants and others are challenging the order passed by the Tribunal in I.A.No.224 of 2019 preferred the appeals which were dismissed by this Tribunal. In Paragraph No. 45 of the order, the Appellate Tribunal held as follows:-

Aggrieved by the order, an Appeal was preferred under Section 62 of the Code before the Apex Court in Civil Appeal and the same was dismissed holding as follows:-

In view of the concurrent findings recorded by the Appellate Tribunal and Supreme Court, the Appellants have no other option except to implement the resolution plan submitted by the resolution applicants/appellants and approved by the Tribunal in I.A. No. 224 of 2018, consequently the Appellants are under obligation to discharge the liability, i.e. the amount due to the applicants.

The Tribunal rightly issue direction for payment of dues and the finding recorded by Tribunal does not call for interference of this Appellate Tribunal, while exercising the power under section 61 of IBC. Hence, the finding recorded by NCLT is upheld. Accordingly, the Comp. App. (AT) (Ins.) No. 678 of 2022 is dismissed.

This Comp. App. (AT) (Ins.) No. 680 of 2022 is filed challenging the order in I.A. No. 229 of 2020 was filed by the lead man of the lenders of the Rainbow Papers Ltd. under Section 60 (5) of IBC read with Rule 11 of NCLT, Rules and Regulation 39 of CIRP, with a request to issue appropriate direction against the Appellants herein to implement the resolution plan including the direction for deposit of balance allotment of debentures, giving of guarantees by the Respondent Nos. 2 to 4 in the application and also made an alternative prayer. However, the Tribunal allowed the application issuing a direction for deposit of amount and issue of debentures etc. aggrieved by the order, Comp. App. (AT) (Ins.) No. 680/2022 is filed.

When the resolution plan is approved and the petition filed for recall of the order of approval by the NCLT was dismissed, it is for the appellants to implement the resolution plan, thus rightly the NCLT allowed the application of lead man of lenders.

In view of our foregoing discussion, this Appellate Tribunal is not required to adjudicate further the matter. Hence, the Comp. App. (AT) (Ins.) No. 680 of 2022 filed by these Appellants is devoid of merits and liable to be dismissed. Accordingly, dismissed.

In the result, the Appeals are dismissed, confirming the orders passed by Hon’ble National Company Law Tribunal, Ahmedabad in I.A. Nos. 229 of 2020, 230 of 2020 and 231 of 2020 dated 24.03.2021, but however, without costs.