Linen Art Private Limited vs Canara Bank & Ors.

[Per : Justice Sharad Kumar Sharma, Member (Judicial)]

An interesting issue that arises for consideration by us is whether when an approved Resolution Plan is silent about the furnishing of a performance guarantee, an amount deposited subsequent to the approval of the Resolution Plan can be forfeited in the absence of a forfeiture clause in the approved Resolution Plan.

In the instant Company Appeal, the Appellant, who was the Resolution Applicant, has questioned the propriety of the Impugned Order dated 25.05.2023, that was passed by the Learned NCLT, Bengaluru Bench, in IA No.53/BB/2022 as preferred in CP(IB) No.66/BB/2018. The Application IA N0.53/BB/2022 was filed by Respondent No.1 herein and after hearing both sides on the said Application, Ld. Tribunal passed the impugned order, directing forfeiture of the amount thus deposited by the Appellant in partial compliance of the Resolution Plan, during its implementation. The observations of Learned Tribunal in para XIV of its order are particularly relevant and will be addressed in the subsequent paragraphs of this Judgement.

Brief facts of the case are that M/s. Saravana Distributors, the Operational Creditor, initiated the proceedings under the Insolvency and Bankruptcy Code, by filing an application under Section 9 of the I & B Code, 2016. The said application was admitted on 13.08.2018, and the corporate insolvency resolution process (CIRP) was commenced. Consequent to it, Resolution plans were invited, during which the Appellant also submitted a plan, which stood approved by the Committee of Creditors on 24.07.2019 and by Learned Adjudicating Authority on 16.09.2019.

It is the case of the Appellant that, owing to Covid-19 pandemic, the business restrictions and lockdowns prevented it from fulfilling the terms and conditions of the Resolution Plan and from making the plant of the Corporate Debtor operational. Expressing its bona fide intention for the implementation of the Resolution Plan, the Appellant filed an application IA No. 29/2021 seeking modifications of the Resolution Plan so as to enable him to implement the Plan to the satisfaction of the Committee of Creditors (CoC) and the stakeholders. The proposal extended by the present Appellant as contained in para-13 of the said application was to the following effect: -

Meanwhile, the Respondent-1 herein during the same period filed an application IA No. 443/2020, seeking liquidation of the CD inter alia on the alleged grounds that the appellant herein had not implemented the resolution plan. Ld. Tribunal upon hearing both the parties in the above applications, passed a common order dated 09.03.2021, observing thereof that the liquidation value of the CD being ₹160 crores, the liquidation of the CD may not benefit the respondent banks and the stakeholders and accordingly directed the CoC members, including Canara Bank to reconsider the grievance of the Appellant mentioned in IA No.29/2021 within three months from the date of the said order and also to consider any further proposal to be made by the Appellant in due course while taking the decision. However, the same could not be successfully implemented. Consequently, the Respondent No.1 approved only the revised payment schedule without taking a decision on the other proposals such as sale of Peenya Plant and sale of other non-core assets and informed the Appellant vide letter dated 05.10.2021 that “the other suggestions for modification shall be examined at the appropriate time”.

It is the grievance of the Appellant that, on one hand, a decision on the directions issued on IA No.29/2021 was kept pending, and on the other hand, the Respondent filed an application IA No. 53/2022, invoking the provisions contained under Section 60(5) to be read with Section 74(3) of the I & B Code, 2016, praying for the following reliefs: -

In fact, considering the relief and the manner it has been modulated in IA No.53/BB/2022, it cannot be ruled out that the basic intention and objective of filing of the application was to dilute the effect of the accommodation and exemption, Learned Adjudicating Authority, vide its order dated 09.03.2021, which had been agreed to be acted upon by the Respondent No.1 as is apparent from the communication issued on 05.10.2021.

Another important feature that requires consideration, particularly in the context of Relief (E) sought in IA No.53/2022 filed by the Respondent, relates to grant of liberty to forfeit Rs.32.60 crores, deposited by the Appellant herein, under the Resolution Plan so as to recoup the losses that was allegedly suffered by the Respondent and the Corporate Debtor. It's from this point that the controversy begun to emerge, namely, whether such a relief by way of an Interlocutory Application (IA No.53/2022) could be entertained or granted, particularly, when the order approving the Resolution Plan has attained finality, as it has not been challenged, and when the modification of the Resolution Plan, owing to Covid-19 situation had already been permitted by the Tribunal vide order of 09.03.2021, which had been acted upon by the bank through its letter dated 05.10.2021. More importantly, Learned Counsel for the Appellant argued that the relief seeking forfeiture of the amount deposited subsequent to the approval of the Resolution Plan, as a measure connected with implementation of the Resolution Plan, could not be granted pursuant to the impugned order, particularly in derogation to the provisions contained under Regulation 36B (4A) of Insolvency Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, and especially in the absence of right of forfeiture reserved under the plan. For the aforesaid purpose, it is apt to extract Regulation 36B (4A) which reads as under: -

The Learned Counsel for the Appellant has argued that under Regulation 36A (4A) of Insolvency Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, a Resolution Plan must contain a clause requiring furnishing of a performance security, to be provided within a specified time period to be specified and that, such a clause must also stipulate that the performance security shall stand forfeited, if the Resolution Applicant, after the approval of the Resolution Plan by the Learned Adjudicating Authority, fails to implement the plan or contribute to its failure. Regulation 36B (4A) prescribes mandatory parameters, making it apparent that for securing performance under the Resolution Plan, the plan must contain a condition requiring the furnishing of performance security. It automatically follows that only if such performance securities provided can the right of future, subjective a clear finding that the resolution applicant has failed to implement the resolution plan as per its terms. All the elements-performance guarantee, right of forfeiture and failure to implement the plan as per its terms-must be read together and in the absence of any such condition, the amount deposited in pursuance of implementation of the Resolution Plan cannot be forfeited as the right for forfeiture must be expressly protected under the plan itself.

It is contended by the Appellant and admitted by the Respondent No.2 too, that the Resolution Plan in the instant case, which was approved on 16.09.2019, in favour of the Appellant, did not contain (i) any condition of furnishing of the performance guarantee; & (ii) any condition permitting forfeiture of the said performance guarantee in the event of failure to comply with the terms and conditions of the Resolution Plan. In that eventuality, the question, which arises as to whether, even if the Resolution Plan was approved on 16.09.2019, and even if the Appellant failed to remit the plan amount except Rs.32.60 crores, such amount could at all have been forfeited by the Impugned Order, which was passed on IA No.53/BB/2022, particularly when the Impugned Order does not satisfy the requirements of Regulation 36B(4A) of the Regulations of 2016.

The Learned Counsel for the Appellant has submitted that any amount deposited pursuant to the terms and conditions of the Resolution Plan, subsequent to its approval will not constitute a performance guarantee which may be forfeited, especially when no such term exists in the approved Resolution Plan, as required under Regulation 36B (4A) of Insolvency Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Despite of the aforesaid legal implication, the Impugned Order has been passed by virtue of which the direction has been issued for forfeiture of the amount Rs. 32.60 crores, while exercise powers under Regulation 36B (4A) of Insolvency Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, and that too when the aspect of failure to comply conditions, stood rectified by the order of Adjudicating Authority dated 09.03.2021 which has attained finality and the parties to the Company Appeal.

The Learned Counsel for the Appellant has argued that, the very basis of the impugned order is contrary to the ratio laid down in in the matters of M/s. GP Global Energy Private Limited Vs Anil Kohli & Anr. decided on 15.12.2022 in Comp App (AT) (Ins) No.14/2022. The distinction drawn by the Appellant, and rightly so, is that Regulation 36B(4A) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, was applied in GP Global Energy Private Limited (supra), because, in that case, the approved Resolution Plan did contain a condition requiring furnishing of a performance guarantee and expressly protected the right of forfeiture, in consonance with the said Regulation 36B (4A). The aforesaid case is therefore entirely distinct from the instant case, as the approved Resolution Plan herein contains no such conditions.

The Appellant accordingly submits that, when in the instant case no such condition has been provided under the Resolution Plan, the amount thus directed to be forfeited by the Learned Tribunal under the impugned order, cannot be sustained, particularly, because the ratio of GP Global Energy Private Limited will not apply to the facts of this case. Which are materially different.

The controversy may also be viewed from yet another perspective, that is, what the term “forfeiture” literally means in the context of the instant Company Appeal. In its literal connotation, forfeiture is a divestiture of specific property without compensation, arising due to an established default, under predetermined terms of the contract or due to an act, forbidden by law. In the present case, the conditions of the approved Resolution Plan do not support the invocation of any forfeiture clause, as no such clause was provided or even remotely intended under the contract. Thus, forfeiture would amount to an act forbidden by law. Forfeiture, in the event of a breach of the Resolution Plan, cannot be permitted through IA No.53/2022 filed by the Respondent, unless the plan itself expressly provided for such a remedy; otherwise, it would violate Regulation 36B(4A) of the 2016 Regulations.

The word forfeiture has been defined in various dictionaries, including Blackstone’s dictionary, which describes forfeiture as synonymous with “punishment”. In the absence of any law or contractual condition reserving the right to forfeit an amount as a form of punishment for failure to satisfy contractual terms (i.e., the approved Resolution Plan), forfeiture cannot be permitted, particularly when it assumes a penal character.

The term forfeiture has also been dealt with by the Hon’ble Apex Court in the Judgment reported in (2007) 2 SCC 624, Yogesh Mehta Vs Custodian Appointed under the Special Court & Ors., specifically, in paragraph 31 therein, which is extracted hereunder: -

Thus, Hon’ble Apex Court has observed that, forfeiture involves the loss or deprivation of property as a consequence of committing an offence punishable by law, or due to a breach of an engagement attracting penal action and it may arise in two situations: (a) where the act constitutes a criminal offence, or (b) where there is a breach of contractual engagement for which forfeiture is expressly provided as a penalty. Neither of the conditions is present in the instant case and therefore, no direction for forfeiture could have been issued in IA No.53/2022 under the Impugned Order.

A similar view was taken by the Hon’ble Apex Court in Shiva Enterprises Vs NTPC-Sail Co Pvt Ltd, AIR 2012 Chh 170. The relevant paragraph is extracted hereunder: -

18^. In the said Judgment, it has been observed that, forfeiture or a loss or a deprivation of goods must arise strictly in accordance with the binding terms and conditions of the contract, which, in this case, would be the approved Resolution Plan. In the event of non-compliance with contractual terms, the contract (i.e., the Resolution Plan) should have expressly contained a clause entitling the Respondent to forfeit the amount contemplated under the contract. It cannot, however, extend to forfeiting the amount deposited by the Appellant as part of partial compliance with the Resolution Plan, because such post-approval deposits are steps toward implementation of the plan and do not constitute performance security. Such amounts, therefore, cannot be treated as security capable of forfeiture in the event of default under the Resolution Plan.

The Hon’ble Apex Court in yet another Judgment reported in AIR 1977 SC 2279, R.S. Joshi Vs Ajit Mills Ltd., observed that forfeiture is a form of prohibition and may be invoked only when there is an established breach of a condition, that attracts a penalty, and it is permissible, only when expressly provided for and reserved to be exercised under the terms of the contract. A similar view was taken in the matter of Yogesh Mehta, (supra), which has been dealt with herein above. In other words, it could be said that, the forfeiture is an “expression” which is “penal in nature”, and it amounts to be a confiscation of an amount, due to inaction, or breach of the terms of the contract. The contract in itself has to contain a precondition permitting the right of forfeiture, which is penal in nature which cannot be done until or unless it is agreed between the parties. That too, particularly when it was a deposit made subsequent to finalisation of the Resolution Plan, and as a step to enforce the conditions of the contract of Resolution Plan.

It is to be noted that the Respondent for the first time, during the course of hearing, had endeavoured to file a compilation of documents, which they intend to rely upon for the purposes of the decision in the instant Company Appeal. The same has been vehemently opposed by the Appellant Counsel, from being taken on record, on the following grounds: -

These grounds that were argued by the Learned Counsel for the Appellant seems to be justified because, first of all, the process contemplated under law providing for taking additional documents on record at an appellate stage prescribes that, under normal circumstances, new documents should not be permitted to be taken on record at an appellate stage until or unless, it satisfied the three exceptions as carved out under Order XLI Rule 27 of CPC. In the absence of there being any application for leave to take these documents on record, and in the absence of there being any ground carved out for the document to be within the ambit of exceptions provided under Order XLI Rule 27 of CPC, these documents are declined to be taken on record for consideration for deciding the instant company appeal.

The Counsel for Respondents has very fairly conceded that, so far as the Resolution Plan is concerned, apparently it did not contain any clause pertaining to the furnishing of the performance guarantee, nor did it include any condition reserving a right of forfeiture, which could have enabled the Respondent to seek to permit a forfeiture of Rs. 32.60 crores before the Learned Adjudicating Authority. As noted in the authorities already discussed, forfeiture is punitive in nature and cannot be permitted, expressly provided for and reserved in the event of an established default under the terms of the contract-here, the approved Resolution Plan. Hence, the documents filed by the respondents are declined to be taken on record, as they were not filed as per the reckoned procedure under law, nor was there even an oral prayer seeking leave to place them on record.

To justify the maintainability of the IA No.53/BB/2022, the Learned Counsel for the Respondent, referred to para-7 of the compilation, which has already been denied by us to be accepted on record. In that eventuality, the propriety of filing of an intervention application i.e., IA No.53/BB/2022, by the Financial Creditor cannot be examined at an appellate stage, as attitude amount to introduce a new ground that was not part of the proceedings at any earlier stage. The Learned Counsel for the Respondent also referred to the contents of para-17 of the aforesaid compilation, contending that the petitioner has deposited a sum of Rs.75 lakhs as a security and has invested huge amount to run the business from the said premises. Even assuming the pleadings made in paragraphs 20 & 22 to be correct, they still cannot be accepted because they fail to satisfy the requirements necessary for invoking the right of forfeiture, in the absence of there being a clause of the extension of performance guarantee, in the light of the provision contained under Regulation 36B (4A) of Insolvency Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Since exercise of a right of forfeiture requires mandatory compliance with the conditions prescribed under the aforesaid Regulation, the argument of the Learned Counsel for the Appellant regarding additional documents sought to be taken on record cannot be accepted and is accordingly rejected by this tribunal.

We are not addressing upon the relief sought in IA No.53/BB/2022, qua the provision contained under Section 74(3) of I & B Code, 2016, because the same has been rejected by the impugned order, and has not been independently challenged by the Respondent by filing any independent appeal. Hence, the finding recorded qua the provision contained under Section 74(3) of I & B Code, 2016, would be treated to have attained finality, as against the Respondent.

Summarise the controversy, we conclude in the following manner: -

Owing to the above, the Comp App (AT) (CH) (Ins) No.220/2023 would stand allowed. The Impugned Order dated 25.05.2023, would hereby stand quashed. The Respondents are directed to lift the forfeiture forthwith. All pending interlocutory applications would stand closed.