Sholingur Textiles Limited vs The Regional Provident Fund Commissioner & Anr.

Per: SAMEER KAKAR, MEMBER (TECHNICAL)

This is a Company Petition viz. CP/66(CHE)/2021, which is sequel to the CA(CAA)/359/2020, filed by the Liquidator of M/s. Sholingur Textiles Limited, under Section 230 to 232 of the Companies Act, 2013 read with applicable provisions of the Insolvency and Bankruptcy Code, 2016 for sanction of a Scheme of Compromise / Arrangement and its Creditors and for takeover of its assets and properties by the Scheme proponents viz. (i) M. Poobalan and (ii) P. Poongodi

The Corporate Insolvency Resolution Process (hereinafter referred to as "CIRP") of the Corporate Debtor viz. Sholingur Textiles Limited was initiated by this Tribunal on 04.02.2019 based on an Application filed the Financial Creditor in CP/1037/IB/2018. Since no viable Resolution Plan in relation to the Corporate Debtor was forthcoming, the Company was ordered for Liquidation by this Tribunal on 13.02.2020 in MA/1192/2019.

The Liquidator, as per Regulation 2B of the Insolvency and Bankruptcy Code of India (Liquidation Process) Regulations, 2016 (hereinafter referred to as "IBBI Regulations, 2016') issued Expression of Interest (EoI) inviting for Schemes as contemplated under Section 230 to 232 of the Companies Act, 2013 and also duly prepared the Information Memorandum. The Liquidator has caused paper publication for EoI in Trinity Express (English) and in Makkal Kural (Tamil) on 23.03.2020.

In the meantime, due to the COVID – 19 pandemic, the Liquidator was of the opinion that the valuation that which was undertaken during the CIRP period may no longer be viable and also due to the steep decline in the property prices in wake of Covid – 19 pandemic, the Liquidator had initiated steps to go for a fresh valuation to be done by two Registered IBBI Valuer and accordingly two Registered Valuers appointed by the Liquidator had submitted their Valuation Report before the Liquidator in the month of July 2020. The said valuation Report was placed before the stakeholders for their consideration.

In response to the EoI, the Corporate Debtor evinced interest from 3 prospective Scheme proponents and finally one prospective Scheme Proponent has submitted draft Scheme before the Liquidator. The Scheme as proposed by Scheme proponent is placed at pages 82 to 129 of the typed set filed along with the Application.

The Learned Counsel for the Liquidator submitted that the Liquidator has convened a Meeting of the Committee of Creditors (CoC) of the Corporate Debtor in order to elicit their opinion as per the ratio laid down by the Hon’ble NCLAT in the matter of **Shivram Prasad -Vs- Dhanapal & Ors.** in Company Appeal (AT)(Insolvency) No. 224 of 2018 as to the viability, feasibility of the Scheme. It is submitted that the CoC in the said meeting dated 27.07.2020 has unanimously proposed to go ahead with the Scheme. However, the CoC has raised certain concerns in relation to the terms / conditions in the Scheme which pertains to the release of Security by the Secured Creditors, to which the Scheme Proponents has modified and clarified the same by submitting an Addendum on 17.08.2020.

While this being the fact, the Liquidator has moved the first motion Application viz. CA(CAA)/359/2020 before this Tribunal on 10.09.2020, under Section 230 of the Companies Act, 2013 seeking for the dispensation or convening the meeting of the creditors/shareholders. Accordingly, a direction was issued by this Tribunal vide its order dated 25.01.2021.

Based upon the orders passed by this Tribunal the Liquidator has appointed the Authorized Representatives for the stakeholders on 09.02.2021 and the Stakeholders meeting was fixed on 01.04.2021. The notice of the meeting was sent to the individual stakeholders / claimants on or before 01.03.2021. Further, it was submitted that the newspaper publication was made on 25.02.2021 and the notice to the statutory authorities was issued in CAA 3 on 25.02.2021.

The Liquidator has also filed a compliance report by way of an Affidavit 7 days before the proposed meeting duly enclosing all the relevant proofs for the compliances made in relation to the convening of the meeting of the stakeholders.

It is seen that the Chairman appointed by this Tribunal has filed his Report and a perusal of the same would show that the Scheme has been approved by the thumping majority of 83.883%. It is also seen that 0.402% have voted against the Scheme and the balance 15.715% have abstained from voting. The consolidated voting Result of the meeting is tabulated hereunder;

Based on the aforesaid facts and circumstances, the Liquidator has submitted that the Scheme of Compromise or Arrangement as proposed by the Scheme proponents for the Stakeholders of the Corporate Debtor is the most fair and reasonable one and that it was submitted that the sanction of the Scheme will benefit the Corporate Debtor and is in the interest of all the stakeholders of the Corporate Debtor and the general public, especially the larger interest of the farmers. Therefore, it was submitted that it would be just and equitable that be Scheme be sanctioned as the same is bound to benefit the Corporate Debtor and its shareholders.

M/s Sholingur Textiles Limited was incorporated in 1964 and registered under the Companies Act, 1956 having its registered office at Race Course Mansion, 2nd Floor 8/1-M, Race Course, (Near Thomas Park Bus Stop) Coimbatore, Coimbatore Tamil Nadu 641018 India, with corporate identification number U17111TZ1964PLC030702.

As per the last audited balance sheet as on 31.03.2018 the share capital of the Company is as under:

Subsequent to 31.03.2018 there has been no change in the authorized, issued, and paid-up capital of the Company.

The Scheme Proponent 1 agrees to infuse a sum of Rs. 16,00,00,000 (Rupees Sixteen Crores only) into the Company. The Scheme Proponent 1 proposes to disburse this amount as two tranches:

An amount of Rs. 5,00,00,000/- (Rupees Five Crores only) will be released in favour of the liquidation estate on the 30th day from the date of approval of the Scheme by the NCLT, Chennai.

The remaining amount to the tune of 11,00,00,000/- (Rupees Eleven Crores only) shall be released in favour of the liquidation estate on the 75th day from the date of approval of the Scheme by the NCLT, Chennai.

The Modus Operandi for the above said amounts to be released in favour of a specified account that the Liquidator may assign and the payments shall be done through either a cheque or RTGS.

The total funds infused into the Company shall be demarcated for two purposes namely: (a) an amount of Rs.80,00,000/- (Rupees Eighty Lakhs only) for the purchase of equity shares in the Company and (b) an amount of Rs.15,20,00,000 (Rupees Fifteen Crores and Twenty Lakhs only) which shall be treated as an unsecured loan in the books of the Company. The abovementioned sum of Rs.16,00,00,0 00 (Rupees Sixteen Crores Only) shall be disbursed in a manner set out in Section 4.3 of this Scheme.

The Company shall issue new Equity Shares in favor of the Scheme Proponents for a subscription amount of Rs.80,00,000/-(Rupees Eighty Lakhs only) in the manner set out in Section 4.2.3. The Scheme Proponents 1 and 2 will acquire entire 100% of the shareholding of the Company, by way of infusion of Rs. 80,00,000/- (Rupees Eighty Lakhs only) into the Company for purchase of Share Capital as detailed in Section 4.2.3 below.

The Company has an authorized capital of Rs.8,00,00,000 with 80,00,000 Nos of Equity shares at Rs. 10/- each. Out of this the Issued, Subscribed and Paid up Capital is Rs.7,24,50,000 with 72,45,000 Nos. of Equity shares at Rs. 10 each. As per Section 4.2.1 of the Scheme, the existing equity shares stand cancelled. As per Section 4.2.2 of the Scheme fresh equity shares worth Rs.80,00,000/- (Rupees Eighty Lakhs only) that are issued ought to be split in the following manner:

All the Preference shares issued by the Company to the tune of 1,93,280 numbers and valued at Rs. 1,93,28,000 (Rupees One Crore Ninety-Three Lakh Twenty-Eight Thousand) shall stand cancelled from the date of approval of this Scheme. Consequent to the above, from the approval of the scheme, the Scheme Proponents 1 and 2 alone shall be the only shareholders of the Company.

The Company shall be converted into a Private Limited Company by way of this scheme. Since Company has very small numbers of shareholders and Company is in no need of more funding from capital and in the interest of shareholders and stakeholders, it would be better to convert the Company into a Private Limited Company. Since the Company can work effectively as a Private Limited Company itself, it is being proposed to convert into a Private Limited Company. The Company after the Scheme is approved does not have many shareholders and it does not need funds requirement from other sources.

Pursuant to this change, the MOA and AOA shall be allowed to be edited to reflect these changes and any other changes as may be required to effectively give effect to these changes.

It is admitted in the Information Memorandum that it is not possible to run a textile mill anymore in the present location due to the fact that majority of the machinery have been removed from the factory and the remaining machinery in the factory are obsolete and redundant. It is also observed that the factory premises itself is dilapidated and cannot be put to use. Therefore, the Scheme Proponents propose to set up various educational institutions in the present location and further set up a trust to run these institutions. The Company however will be the one to provide the infrastructure and the necessary aids to commence and continue running these institutions. The Company will therefore be revived and the functioning of the same will commence as soon as this scheme is sanctioned by the Hon'ble NCLT. Therefore, since the main objectives of the Company are proposed to be changed, it is sought that the main objectives in the Memorandum of Association may be changed and any other requisite changes required in the Memorandum of Association and Articles of Association may be made by the Scheme proponents in compliance of statutory provisions.

The Director General of Foreign Trade (DGFT) has filed its objection to the scheme. It was submitted by the Learned Counsel for the objector that the Scheme does not contemplate any payment to the objector and the objector is a statutory authority to whom the liquidator has served the notice as per the tenets of the Companies Act, 2013. It was submitted that Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016 provides for a Scheme to be propounded in liquidation and the same does not envisage the doctrine of "clean slate" as available in the Resolution Plan. In support of his contention he relied upon the following judgments;

a. Visisth Services Limited vs S V Ramani, Company Appeal (AT) (Insolvency) No.896 of 2020

b. MS Vishwanathan vs Pixtronic Global Technologies Pvt Ltd, IA/1215/CHE/2021

c. M/s. Shiv Shakti Inter Globe Exports Pvt. Ltd. Vs. M/s KTC Foods Private Limited Through Liquidator, Mr. Anup Kumar Singh, Company Appeal (AT) (Insolvency) No, 650 of 2020 (to distinguish between sale of Corporate Debtor as "going concern" and sale of "business as a going concern"), (in this case, the sale was held to be on "clean slate" basis, where in liquidation, the business was sold on "going concern" basis).

Thus, it was submitted that the Scheme envisages transfer of the Corporate Debtor as a going concern on "clean slate" basis, which is evident from clauses 4.4.3, 4.4.6 and various other terms contained in part 4.4 of the Scheme. It is trite law that a resolution plan or a scheme, which is in contravention of any law for the time being in force, will not be approved by this Adjudicating Authority and under the said circumstances prayed for dismissal of the present Application.

In reply to the objection raised by DGFT, the Learned Counsel for the Liquidator submitted that the objector viz. DGFT has neither during the CIRP nor during Liquidation process, till date, has preferred to file the claim as per the procedure prescribed under the provisions of IBC, 2016. Further, the last date for filing claims for the Corporate Debtor under Liquidation was 18.03.2020 and as of the date of the reply, a period of 646 days has since elapsed for filing a valid claim. Further, it was submitted that no application for condonation of delay has been filed by the objector. It was submitted that only now the objector has come forward to file a purported objection memo, which is factually incorrect and bereft of any supporting documents and does not put forth any valid objection to the Petition under consideration.

It was submitted by the Learned Counsel for the Liquidator that he has written two letters / emails to the objector on 18.02.2020 and 04.12.2020 informing that a claim has to be lodged and has not been filed and that the same may be taken up by moving before the Adjudicating Authority under the provisions of IBC, 2016 in view of the delay. However, inspite of the same, the objector has chosen to remain silent and has now come forward to file the present objection memo.

Thus, it was submitted that no claim has been filed by the Objector for adjudication during the Liquidation Process and the statement made in the Objection Memo can have no legal effect whatsoever on the Liquidation Estate of the Corporate Debtor. Further, it was submitted that all claims must be submitted, collated, verified or adjudicated in order to be eligible for any distribution during the CIR process or Liquidation Process. In support of the same, the Learned Counsel for the Liquidator relied upon the Judgment of the Hon'ble NCLAT in the matter of Municipal Corporation Faridabad Vs Sajeve Bhushan Deora & Ors vide order dated 08-Dec-2021 delivered in the context of a belated claim by a statutory creditor would squarely apply to the facts of the matter and is cited in support of the stand of the Liquidator. The Orders passed by this Bench in BHEL Vs V Mahesh, Liquidator of M/s Nagarjuna Oil Corprn Ltd dated 01- Jun-2021 in I.A 840/1B/2020 in M.A No 289 of 2018 in TCP/10/18/2017 (vide Annexure-4) is also cited in support of the same.

The Learned Counsel for the Liquidator further submitted that the objector herein being the Office of the DGFT had full notice of the Corporate Debtor that they are under Liquidation and should have filed its claim, participated in the stakeholders meeting and voted on the Scheme of Compromise that was tabled. Having elected not to do so, it was submitted that the objector loses its rights if any in reference to the claim and the majority vote of the stakeholders to approve the Scheme extinguishes the claim if any. Further, it was submitted that for the sake of argument, if the DGFT had filed its claim amounting to Rs.2.61 crores and had voted against the Scheme, yet the Scheme would have stood approved by 81.36% of the vote much higher than the required 75%.

Having heard the argument made by the Learned Counsel for the objector and the reply argument of the Learned Counsel for the Liquidator we find credence in the submissions made by the Learned Counsel for the Liquidator that even though the Liquidator has written two letters/emails to the objector on 18.02.2020 and 04.12.2020 informing that a claim has to be lodged, the objector preferred to be indolent and not moved any application before this Tribunal seeking condonation of delay in filing the claim. Thus the principle of 'vigilantibus non dormientibus jura subveniunt' (The law assists the vigilant, not those who sleep) would squarely apply to the present case.

Further, the objector, eventhough if his claim is admitted would be having only 2.52% of the voting share and as rightly pointed out by the Learned Counsel for the Liquidator that if the DGFT had voted against the Scheme, yet the Scheme would have stood approved by 81.36% which is much higher than the required mandate of 75%.

Further, the objector has in his objection report has stated that the principles of "clean slate" is available only during the CIRP period and does not apply to the Liquidation process.

In this connection, it is significant to refer to the Judgment of the Hon'ble NCLAT in the matter of Ramesh Kumar Chaudhary & Anr. -Vs- Anju Agarwal, Liquidator of M/s. Shree Bhawani Paper Mills Ltd. & 3 Ors. in Company Appeal (AT) (Insolvency) No. 957 of 2021 wherein at para 21 to 27 it has been held as follows;

“Generically in context of financial instruments, refers to the rescheduling or alteration of terms of the instrument, generally adversely affecting the interest of the instrument holder. For example, elongating the repayment terms of a loan, or reducing security. In ISDA definitions, restructuring as a credit event is defined as events as a result of which the terms, as agreed by the reference entity or governmental authority and the holders of the relevant obligation, governing the relevant obligation have become less favourable to the holders that they would otherwise have been. These events include a reduction in the principal amount or interest payable under the obligation, a postponement of payment, a change in ranking in priority of payment or any other composition of payment.”

Thus, a Scheme proposed under Section 230 of the Companies Act, 2013 may also include extinguishment of the claim of the Creditors and the decision of the majority (75%) of the creditors in this regard will bind the minority. Hence, the objections raised by the DGFT in relation to the approval of the Scheme under Section 230 of the Companies Act, 2013 are devoid of merits and accordingly stand overruled.

This Application has been filed by the Liquidator of the Corporate Debtor under Section 60(5) of IBC, 2016 against (i) Regional Provident Fund Commissioner, Vellore and (ii) M/s. Edelweiss Asset Reconstruction Company Limited, seeking relief as follows;

The Respondent EPFO has submitted the claim before the Liquidator for a sum of Rs.1,57,02,503/- in Form F dated 24.02.2020. It was submitted that the Respondent has contended that the entire claim of Rs.1,57,02,503/- is to be paid in full. Further, it was submitted that the claim of the Respondent under the head “interest”, or “penal damages” can neither be treated as “secured” nor can it be given under priority under Section 36(4)(a)(iii).

These issues raised are no longer res integra in view of the decision of the Hon’ble NCLAT in the matter of Jet Aircraft Maintenance Engineers Welfare Association wherein it has been held that non-payment of the dues of the Employees Provident Fund Organization in full would amount to breach of the provision of Section 30(2)(e) of IBC, 2016. Further, by relying upon the Judgment of the Hon’ble Supreme Court in the matter of Maharashtra State Cooperative Bank Limited -Vs- Assistant Provident Fund Commissioner; (2009) 10 SCC 123, it has been held by the Hon’ble NCLAT that any amount due from the employer appearing in sub-section (2) of Section 11 of the Employees Provident Fund and Miscellaneous Provisions Act, 1952, also covers the amount determined under Sections 7A, 7Q, 14B and 15(2) of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and the preposition as laid down by the Hon’ble Supreme Court squarely applies in the above case. Also, by placing reliance upon Section 36(4)(a)(iii) of IBC, 2016 it was held that Provident Fund dues are not subject to distribution under Section 53(1) of IBC, 2016.

Thus, it is made clear that the EPFO are entitled to their full claim of Rs.1,57,02,503/-. With the above said directions IA/686/2020 stands disposed off.

The Scheme Proponents have sought certain Waiver / Relief / Concessions from this Tribunal in Clause 17 of the Scheme so as to implement the Resolution Plan. These are ordered as follows;

It is made clear that this Sanction of Scheme does not automatically construe that the approvals in relation to the statutory authorities or Government or any other authority is automatically granted.

The Sanction of the Scheme in relation to the objective stated by Scheme proponent and recorded in para 24 of this order is binding on the proponent of the Scheme.

During the Implementation Period, the Liquidator shall act as the Chairman of the Monitoring Committee and the members of the Stakeholders Committee shall form part of the Monitoring Committee till the tenure of completion of the Scheme.

While approving the Scheme as above, it is clarified that this order should not be construed as an order in any way granting exemption from payment of stamp duty, taxes or any other charges, if any, payment is due or required in accordance with law or in respect to any permission/compliance with any other requirement which may be specifically required under any law

Thus, the Scheme of Compromise or Arrangement for takeover of assets and properties of Sholingur Textiles Limited is hereby approved and is binding on the Corporate Debtor viz. Sholingur Textiles Limited and all other stakeholders involved. The Liquidator is directed to file the certified copy of this order to the Registrar of Companies concerned for registration. As a consequence thereof, CP/66/2021 stands allowed. All other Applications filed by the objectors, if any which is pending, also stands closed in terms of this order.