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Judgment
PER SHRI L. N. GUPTA, MEMBER (T)
The present I.A. No. 2757 of 2021 is preferred jointly by Mr. Adiish Jain, Mr. Mohinder Jain and Mr. Anuj Goyal (hereinafter referred to as “Applicants”) against Mr. Vivek Raheja, who is the RP of the Corporate Debtor namely, J.P Engineering Pvt. (hereinafter referred to as RP/Respondent No.1) under Section 60(5) of IBC, 2016 read with Rule 11 of NCLT Rules 2016.
That the Applicants have made the following prayers in the application under consideration :
“i)That this Hon’ble Tribunal be pleased to direct the Resolution Professional and the CoC to accept the EOI of the Applicant(s) as Prospective Resolution Applicant under Section 240A IBC and include the Applicants in the Final List of Prospective Resolution Applicants; and/or
ii) That this Hon’ble Tribunal be pleased to direct the Resolution Professional and the CoC to consider the request for waiver/relaxation of Eligibility Criterion requirements of minimum Turnover of 25 Cr. for the Applicants; and/or
iii) That this Hon’ble Tribunal be pleased to direct the Resolution Professional and the CoC to otherwise permit the Applicant(s) to participate in the Resolution Process of J.P. Engineering Pvt. Ltd. So as to maximize the asset value of the Corporate Debtor; and/or
iv) pass any other directions upon the Respondents as deemed necessary in the interest of justice.”
To put succinctly, the facts of the case are that the Operational Creditor, M/s World Wide Metals Pvt. Ltd. had filed an application bearing no IB-1048(ND)/2019 under Section 9 of IBC 2016 for initiation of CIR Process against the Corporate Debtor M/s. J.P. Engineering Pvt. Ltd. That vide Order dated 26.02.2020, this Adjudicating Authority had initiated the CIR Process against the Corporate Debtor.
That the main grievance of the Applicants is that the IRP has rejected their EOI and has held the Applicants to be ineligible vide Provisional List of Prospective Resolution Applicants dated 10.06.2021 and thereafter, confirmed their exclusion in the Final List of Prospective Resolution Applicants vide email dated 24.06.2021 after rejecting the objections of the Applicants dated 15.06.2021. The Applicants are also seeking relaxation in the eligibility criteria of having a minimum turnover of Rs. 25 Crore for the Prospective Resolution Applicants.
That in order to support their contention, the Applicants have submitted the following:
That the Expression of Interest in Form-G was published by Resolution Professional (RP) on 14.05.2021. As per the Process Memorandum, last date of receipt of Expressions of Interest was notified as 31.05.2021 and the last date for submission of Resolution Plan was notified as 15.07.2021. The Applicant has also placed on record the Eligibility Criteria published for the Potential Resolution Applicants. The scanned copy of the same is reproduced below:
It is stated that as soon as the Applicants came to know about the invitation for expression of interest issued for the corporate debtor, the Applicants jointly submitted the EOI on 31.05.2021 along with refundable earnest deposited of Rs. 5 lacs.
It is submitted by the Applicants that during the aforesaid period, Union Bank of India (Member of CoC) issued the order dated 07.06.2021 passed by the Identification Committee classifying the Corporate Debtor M/s J.P. Engineering Pvt. Ltd. along with its Directors and Guarantors as Wilful Defaulters. The said order was communicated to the RP vide email dated 07.06.2021.
It is further submitted that vide email dated 08.06.2021, the RP communicated the detailed reasons for rejection of the EOI of the Applicants. Thereafter, emails were exchanged between the Applicants and RP regarding ineligibility of the applicants.
It has been added that vide email dated 10.06.2021, the RP communicated the Provisional List of Prospective Resolution Applicants, to which the Applicants submitted objections vide their email dated 15.06.2021. The scanned copy of the same is reproduced overleaf :
It is further added that the RP disposed of the objections and confirmed exclusion of the Applicants from the final list of Prospective Resolution Applicants vide email dated 24.06.2021. The scanned copy of the email dated 24.06.2021 is reproduced overleaf :
It is also submitted by the Applicants that the Corporate Debtor is a Small Enterprise processing/manufacturing basic precious and other non-ferrous metals as reflected in Udyog Aadhar Registration Certificate dated 27.09.2019, the scanned copy of which is reproduced overleaf :
That as regards to seeking relaxation in the eligibility criteria of having minimum turnover of Rs. 25 Crore, the Applicants have placed reliance on the Judgement dated 20.04.2021of the Hon’ble NCLAT in the matter of ‘Sarvana Global Holdings Limited Vs. Bafna Pharmaceuticals Ltd.’ in Company Appeal (AT) Insolvency No. 203/2019 and the Order dated 20.04.2021 passed by NCLT, Kochi Bench in IB No. 52/KOB/2019, wherein, it has been observed that “If the Corporate Debtor is an MSME, it is not necessary for the promoters to compete with other Resolution Applicants to regain control of the Corporate Debtor.”
In regard to the declaration of the Applicants as Wilful Defaulter and barring them under Section 29A(b) of the IBC, 2016, it is submitted by the Applicants that as per clause 3(c) of the “RBI’s Master Circular dated 01.07.2015 on Willful Defaulters”, the Wilful Defaulter status becomes final only after it is confirmed by the Review Committee. The applicants have further argued that assets of the corporate debtor ought to be deemed to be the assets of the Directors/Promoters for the limited purpose of being Resolution applicants as all the gains of the Directors/Promoters have always been invested into the Corporate Debtor prior to the CIRP.
That during the course of hearing on 23.07.2021, the Ld. Counsel for the Union Bank of India (Majority Stakeholder in COC), Mr. P.B.A. Srinivasan submitted that vide order dated 07.06.2021 of the Union Bank of India Stressed Asset Management Vertical, New Delhi, the Applicants herein are classified and declared as Wilful Defaulters in terms of the order passed by the Identification Committee for wilful defaulters. On a query raised by this Bench, Mr. P.B.A. Srinivasan stated that the said order passed by the Identification Committee is valid till the same is challenged or reversed by the Review Committee.
Subsequently, during the hearing on 03.08.2021, it was brought to our knowledge by the Applicants through IA-3308/2021 that they, in the meantime, had approached the Hon’ble High Court of Delhi in a Writ Petition bearing no. W.P(.C) 6970/2021 & CM APPL NO. 20020/2021 titled as “Mohinder Jain & Anr. Vs Union Bank of India”. The said writ Petition was disposed of in terms of the submissions made by Ld. Counsel appearing on behalf of the Union Bank of India, Mr. P.B.A. Srinivasan. The relevant extracts of the order are reproduced below :
“3.Mr. P.B.A. Srinivasan, learned counsel who appears for Bank on advance notice, states that the Bank has never represented before any authority that the proceedings before the Review Committee have concluded. The only factual submission that the Bank has made is that the petitioners have been identified as wilful defaulters by the Identification Committee and the matter is pending before the Review Committee. Mr. Srinivasan further clarifies that the declaration of the petitioners as wilful defaulters under the Master Circular will take effect only if the order of the Identification Committee is confirmed by the Review Committee.
4.In view of the aforesaid clarification, no further orders are required in this writ petition. The writ petition, alongwith the pending application, is disposed of, recording Mr. Srinivasan’s submissions as above.
In the light of the aforesaid submissions vide IA 3308/2021, the Applicants prayed for rehearing of the present Application which was heard on 03.08.2021 and rejected. However, the parties were given liberty to file additional written synopsis.
That the RP/Respondent No.1 has filed its reply to the present application and written submissions and disputed the status of the Corporate Debtor as MSME as well as reiterated that the Applicants continue to be wilful defaulters. The detailed objections filed by the RP are summarised below:
That as regards to the claim of the Applicants of the Corporate Debtor being MSME, it is averred in the Reply by the RP :
“a)That Section 2(e) of the Micro, Small and Medium Enterprises Development Act, 2006 (the “Act”) defines the word “enterprise” as “an industrial undertaking or a business concern or any other establishment by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services.
b)That inasmuch as the Legislature has not given any technical or artificial meaning to the word “manufacture” used in the definition of “enterprise” in the Act, it may be of significance to refer to the dictionary meaning of the word “manufacture”. Webster's New International Dictionary, Second Edition, Vol. II, gives the following meaning of the word “manufacture” :
“(a)The process or operation of making wares or any material products by hand, by machinery or by other agency, often such process or operation carried on systematically with division of labour and with the use of machinery;
(b)Anything made from raw materials by hand, by machinery or by art;
(c)The making of anything by any agency or process.”
ii) It is stated by the RP that the Balance Sheet of the Corporate Debtor as on 31st March 2020, depicts inventory of ‘NIL’ value. He has contended that the Corporate Debtor was never engaged in the business of manufacturing anything.
iii) That when, “Significant Accounting Policies & Notes to the Accounts” section of the audited Balance Sheet for the F.Y. 2019-20 of the Corporate Debtor is perused, the nature of business of the Corporate Debtor as reported by the Auditor is “Trading of Aluminium Ingot, Aluminium Billet and Aluminium Rod, etcetera”.
iv) It is further stated by the RP that, to be eligible for MSME classification under Section 7 of the MSME Act, an industrial undertaking or a business concern or any other establishment must show itself to be an “enterprise” under Section 2(e) of the Act. He has submitted that being an “enterprise” is a condition precedent to the “classification as MSME”. It is added that mere investment in Plant & Machinery cannot be taken or deemed to be the sufficient criterion for classifying an industrial undertaking or a business concern or any other establishment as ‘MSME’.
As regards to the prayer for seeking relaxation in eligibility criteria of having minimum turnover of Rs. 25 Crore, it is averred by the RP :
“e. That in the 7th CoC meeting, while keeping into consideration the complexity of business (vide sub-para c above) and scale of operation (vide sub-para d above), the CoC, in its commercial wisdom, had fixed the eligibility criteria as A) Net worth: ₹5 crores, and B) Turnover: ₹25 crores. The eligibility criteria [Item No. 11 and Resolution No. 4] was placed for e-voting, wherein 93.46% votes were cast in favour of the Resolution.”
vi) That in order to support its contention, the RP has placed emphasis on the Judgement of Hon’ble Supreme Court in the matter of K. Sashidhar v. Indian Overseas Bank & Ors. [Civil Appeal No. 10673 of 2018], which upheld the supremacy of the commercial wisdom of COC.
vii) It is added by the RP that the reliance placed by the Applicants on the Judgment of Hon’ble NCLAT in Sarvana Global Holdings Ltd. & Anr. v. Bafna Pharmaceuticals Ltd. & Ors. [Company Appeal (AT) (INS) No. 203 of 2019] is misplaced inasmuch as the said judgment is distinguishable on the facts and merits of the case. He has stated that in the matter of Sarvana Global Holdings Ltd. & Anr. v. Bafna Pharmaceuticals Ltd. & Ors., the Hon’ble Appellate Authority was dealing with a case where the 3rd Respondent’s (corporate debtor being MSME) Resolution Plan was approved by the CoC without giving an opportunity to the Appellants. The judgment does not even bleakly whisper that the eligibility criteria as decided by RP with approval of CoC, as per the requirements of Section 25(2)(h) can be relaxed for the promotors of a corporate debtor who are classified as MSME.
viii) It is further added that the Hon’ble Appellate Authority, in Para 19 of the said judgment, records that eligibility under Section 29A is a prerequisite for the consideration of a Resolution plan. Further, it holds in Para 22 of the Judgment that:
“… in exceptional circumstances, if the ‘Corporate Debtor’ is MSME, it is not necessary for the Promotors to compete with other ‘Resolution Applicants’ to regain the control of the ‘Corporate Debtor’.
It is stated that only in exceptional circumstances, the promoters of corporate debtor being MSME, can be permitted to not compete with other Resolution Applicants and it cannot be taken as the strait jacket rule.
ix) As regard to the status of Applicants as ‘Wilful Defaulters’ and the order of Hon’ble High Court of Delhi passed in the matter of W.P. (C) 6970/2021- the following is submitted by the RP in its additional written Synopsis :
“1.The order dated 26.07.2021, passed in the aforesaid writ has only recorded the submissions made by the Union Bank of India (Respondent therein);
2.The order dated 26.07.2021, passed in the aforesaid writ, has not been passed on merits after considering the facts of the case as set out by the Applicants in I.A. 2757 of 2021, sub-judice before this Hon’ble Adjudicating Authority;
3.The order dated 26.07.2021, passed in the a foresaid writ, has not stayed the order (WD: IDC: ORDER: 1109) dated 03.07.2021, passed by the Identification Committee for Wilful Defaulter of the Union Bank of India; and
4.The Hon’ble Writ Court has not tested the applicability of the Master Circular on Wilful Defaulters, issued by the Reserve Bank of India (the ‘Master Circular’), on the anvil of Section 29A(b) of the Insolvency and Bankruptcy Code, 2016 (the “Code”).”
As regards to the para 3 of the Master Circular of RBI dated 01.07.2015 on Willful Defaulters, the following is averred by the RP sub clause-wise :
xi) The RP has further argued that the Clause 3 of the Master Circular should be read in stages for the purposes of Section 29A(b) of the Code and it cannot be construed to mean that order of the Identification Committee is without an administrative strength inasmuch as sub-clause (c) to clause 3 of the Master Circular is not a non-obstante clause. In other words, sub-clause (c) of clause 3 of the Master Circular does not override sub-clauses (a) and (b) thereto.
xii) It is further added that Section 29A(b) of the Code starts with the expression, “is a wilful defaulter”, which is the mandate ‘in affirmative’ and ‘without exceptions’. It is followed by the expression “in accordance with”, which clearly means that if a person has been declared as a wilful defaulter at the stage of order of the Identification Committee, the said person is a wilful defaulter for the purposes of Section 29A(b) of the Code, notwithstanding the order of the Review Committee
xiii) It is also submitted by the RP that the Applicants have challenged the order of the Identification Committee before the Review Committee only on 15th June 2021 i.e., subsequent to the date of issue of List of PRAs on 10.06.2021.
After hearing submissions of both the Parties, perusing reply, documents and additional written synopsis placed on record, we observe that the major grounds of rejection of the EOI of the applicants by the RP are certain reservations about the MSME status of the Corporate Debtor and declaration of the Applicants as Wilful defaulter by the Identification Committee of the Union Bank of India, thus rendering them ineligible under section 29A(b) of IBC. Additionally, the RP has stated that the Applicants have also not met the eligibility criteria.
As regards the reservation of RP regarding the MSME status of the Applicants/Corporate Debtor, we observe that though the Applicants have furnished the online generated Udyog Aadhar Certificate, it is a matter of fact which can be ascertained by the Resolution Professional. We are not inclined to interfere or investigate into the status of the Applicants, since it is a fact which can be verified by the RP from the Director of Industries of the State concerned, where the enterprise is said to have been located.
As regards the Wilful Defaulter status of the Applicants, on the one hand, the Ld. Counsel for the Union Bank of India (majority stakeholders in CoC) during the hearing on 14.07.2021 submitted that the Applicants are classified as wilful defaulters in terms of order of the Identification Committee and the order passed by the Identification Committee is valid till the same is challenged or reversed by the Review Committee, on the other hand in the submissions made before the Hon’ble High Court of Delhi, the Ld. Counsel for the Union Bank of India submitted that the status of the Applicants as wilful defaulter will take effect only if the order of Identification Committee is confirmed by the Review Committee. As regards the second prayer regarding relaxation in the eligibility criterion of having a minimum Turnover of Rs. 25 Crore for submission of an EOI, it has been submitted by the Resolution Professional that the same has been set by the CoC by passing a resolution in its 7th Meeting held on 03.04.2021 by 93.46% voting share.
Hence, the issues which remains for our adjudication are –
I. “Whether the issue regarding status (i.e., declaration /classification) of Applicants as ‘Wilful Defaulters’ be Adjudicated by this Authority under Section 60 of IBC read with Rule 11 of the NCLT rules, 2016 and whether RP could be directed to accept the EOI as PRA of the Applicants under section 240A of IBC ?”
II. “Whether this Adjudicating Authority can waive / relax the Eligibility Criterion of having a minimum Turnover of 25 Crore for the Applicants fixed by the COC ?.”
That here, it is worthwhile to refer to the Judgement dated 08.05.2019 passed in the matter of State Bank of India Vs M/S. Jah Developers Pvt. Ltd. & Ors. Civil Appeal no. 4776 of 2019, wherein the Hon’ble Supreme Court held that both the Identification and Review Committees as referred to in the Master Circular of RBI cannot be considered as Judicial Bodies. The relevant extracts of the Judgement are reproduced below -
“12..... Applying the aforesaid tests to the facts of the present case, it cannot be possibly said that either in-house committee appointed under the Revised Circular dated 01.07.2015 is vested with the judicial power of the State. The impugned judgment’s conclusion that such Circulars have statutory force, as a result of which the State’s judicial power has been vested in the two committees, is wholly incorrect. First and foremost, the State’s judicial power, as understood by several judgments of this Court, is the power to decide a lis between the parties after gathering evidence and applying the law, as a result of which, a binding decision is then reached. This is far from the present case as the in-house committees are not vested with any judicial power at all, their powers being administrative powers given to in house committees to gather facts and then arrive at a result. Secondly, it cannot be said that the Circulars in any manner vests the State’s judicial power in such in-house committees. On this ground, therefore, the view of Delhi High Court is not correct, and no lawyer has any right under Section 30 of the Advocates Act to appear before the in-house committees so mentioned. Further, the said committees are also not persons legally authorised to take evidence by statute or subordinate legislation, and on this score also, no lawyer would have any right under Section 30 of the Advocates Act to appear before the same.”
From the aforesaid Judgement, it is observed that none of the two Committees (i.e., the Identification Committee and the Review Committee) appointed under the Revised Circular dated 01.07.2015 are vested with Judicial Powers. Evidently, both the Committees are internal bodies of a Bank and the decision to declare a person as ‘wilful defaulter’ is the decision of these in-house/administrative committees.
Further, it is observed that these In-house Committees are required to work as per the framework and guidelines issued by the RBI. Neither the constitution or their working or decision-making power of these Committees is governed by the IBC, 2016 nor the Code empowers this Adjudicating Authority to Adjudicate upon any dispute relating to or legality of the decision of declaring/classifying a person(s) as wilful defaulter arrived at by these In-house committees.
That under Section 29A(b) of IBC 2016, the only thing which this Adjudicating Authority is required to see whether a person is a ‘wilful defaulter’ in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949. The IBC nowhere empowers this Adjudicating Authority to adjudicate upon any dispute regarding declaration of a person(s) as Wilful Defaulter.
That from the order of the Identification Committee dated 07.06.2021 of the Union Bank of India as quoted in para 5(iii) supra, we observe that besides the Applicants/Promoters, the borrower Company/Corporate Debtor i.e., M/s/ J.P. Engineering Pvt. Ltd. has also been classified as the Wilful Defaulter. With the commencement of CIRP, RP is in the control and management of the Corporate Debtor, who has neither challenged nor filed any application challenging the status of the Corporate Debtor as wilful defaulter. Therefore, in our considered view, the dispute with regard to classification of wilful defaulters essentially lies between the Applicants and Union Bank of India, and certainly, it is not arising out of the CIR Process of the Corporate Debtor.
Here, since the present Application has been preferred under Section 60(5) of IBC 2016 read with Rule 11 of NCLT Rules 2016, it is worthwhile to refer to the recent decision dated 08.03.2021of the Hon’ble Supreme Court in the matter of Gujarat Urja Vikas Nagar Nigam Limited Versus Amit Gupta & Ors. in Civil Appeal Number 9241 of 2019, wherein it has been clearly laid down that NCLT cannot exercise its jurisdiction over matters dehors the Insolvency Proceedings. The relevant extracts of the Judgement are reproduced below :
“87 The residuary jurisdiction of the NCLT under Section 60(5)(c) of the IBC provides it a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings. If the jurisdiction of the NCLT were to be confined to actions prohibited by Section 14 of the IBC, there would have been no requirement for the legislature to enact Section 60(5)(c) of the IBC. Section 60(5)(c) would be rendered otiose if Section 14 is held to be the exhaustive of the grounds of judicial intervention contemplated under the IBC in matters of preserving the value of the corporate debtor and its status as a ‘going concern’. We hasten to add that our finding on the validity of the exercise of residuary power by the NCLT is premised on the facts of this case. We are not laying down a general principle on the contours of the exercise of residuary power by the NCLT. However, it is pertinent to mention that the NCLT cannot exercise its jurisdiction over matters dehors the insolvency proceedings since such matters would fall outside the realm of IBC. Any other interpretation of Section 60(5)(c) would be in contradiction of the holding of this Court in Satish Kumar Gupta (supra). ” (Emphasis Supplied)
As regards the prayer of directing the RP to accept the EOI as PRA of the Applicants under section 240A of IBC, it is necessary to refer to the contents of Section 240A.(1) of IBC, 2016, which are reproduced below-
“240A. Application of this Code to micro, small and medium enterprises. – (1) Notwithstanding anything to the contrary contained in this Code, the provisions of clauses (c) and (h) of section 29A shall not apply to the resolution applicant in respect of corporate insolvency resolution process [or pre-packaged insolvency resolution process] of any micro, small and medium enterprises.”
From the above, it is observed that the issue relating to Section 29A.(b) is beyond the purview of Section 240A of IBC, 2016.
The Second issue which requires our consideration is “Whether this Adjudicating Authority can/should waive/relax the Eligibility Criterion of having a minimum Turnover of 25 Crore for the Applicants ?”
That the Applicants have relied upon the Judgement of the Hon’ble NCLAT in ‘Sarvana Global Holdings Limited Vs. Bafna Pharmaceuticals Ltd.’ [Company Appeal (AT) Insolvency No. 203/2019] and Order dated 20.04.2021 passed by NCLT, Kochi Bench in IBA No. 52/KOB/2019, wherein, it has been observed that “If the Corporate Debtor is an MSME, it is not necessary for the promoters to compete with other Resolution Applicants to regain control of the Corporate Debtor.” Per contra, the Resolution Professional has stated that the aforesaid Judgment has not dealt with the issue of relaxing the criteria. He further stated that it is also held in the aforesaid Judgement that in exceptional circumstances, if the ‘Corporate Debtor’ is an MSME, it is not necessary for the Promotors to compete with other ‘Resolution Applicants’ to regain the control of the ‘Corporate Debtor.
We notice that the Resolution for setting the Eligibility Criteria in terms of turnover, net worth etc for submitting the Expression of Interest has been passed by the CoC in its wisdom in the 7th Meeting with 93.46% voting share. In our considered view, setting of the criteria in terms of Turnover and Net Worth for inviting Expressions of Interest is a Commercial decision of the CoC, which is applicable to all and is in rem. Therefore, in our view, a preference cannot be given by this Adjudicating Authority to the applicants over all other proposed or such Applicants, who could not apply because of the eligibility criteria duly notified.
That from the Provisional List of the Prospective Resolution Applicants (PRAs) published by the RP, we notice that in the present case, there are 02 other Prospective Resolution Applicants, who have fulfilled the eligibility criteria. The scanned copy of the Provisional List of Prospective Resolution Applicants (PRAs) is reproduced below :
Hence, it is not the case of ‘no’ or ‘single’ Prospective Resolution Applicant (PRA) for resolution of the Corporate Debtor. As evident from the List (Supra), there are 02 PRAs for competition/maximizing the value of assets during the process of resolution. Therefore, no exceptional circumstances have been made out, for which the criteria notified and already acted upon by the COC shall be tinkered.
We also notice that the Applicants who seems to be keen to regain the control and the management of the Corporate Debtor by seeking relaxations such as above have not explored at any stage post-formation of COC, the ‘exit route’ available under Section 12(A) of IBC, 2016.
In sequel to the discussion above, we do not find any merit in the Application. The IA-2757/ND/2021 is Dismissed, being devoid of merits.