Corporate Debtor Can Withdraw Application Filed Under Sec.10 IBC On Making OTS Offer To Creditor : NCLT [Read Order]
The Bench also allowed the Resolution Application to allow its resolution plan, which was approved by CoC.
Can a corporate debtor, which had filed application for initiating insolvency process against itself, be allowed to withdraw it application at the fag end of the process on the ground that its offer of 'one-time settlement'(OTS) is acceptable to the sole financial creditor? Also, can a resolution application, whose plan was accepted by the Committee of Creditors, be allowed to withdraw its plan, citing the OTS offer by the corporate debtor to the financial creditor?
The National Company Law Tribunal, Mumbai bench was faced with this unprecedented situation.
To resolve the intricate situation, the NCLT adopted a creative interpretation of IBC and allowed the corporate debtor to withdraw the petition for its insolvency, though with costs, besides allowing the ex-director of the corporate debtor to make a one-time settlement offer to the financial creditor which was better than the resolution plan already under consideration for approval before the NCLT.
In doing so, M K Shrawat, Member (Judicial) decided the following issues:
- Whether an Applicant who has filed an Application/Petition u/s 10 of the IBC is entitled to withdraw its own petition u/s 12A of IBC 2016.
- Whether a Resolution Applicant who has submitted a Resolution Plan which was approved with majority vote by CoC can be allowed to withdraw the said Resolution Plan which is under consideration for approval before the NCLT?
- Whether ex-director of the Corporate Debtor, which is under Insolvency can offer One Time Settlement (OTS) with the Financial Creditor/Creditors if qualified u/s 29A of the Insolvency Code 2016?
The case pertains to corporate debtor SBM Paper Mills Ltd, which was incorporated to carry out trading activity of papers.
SBM Paper Mills had filed an application under section 10 of the Insolvency Code in respect of a default in payment of loan of one 'Financial Creditor' that is Allahabad Bank. The application was admitted on October 17, 2017 with declaration of commencement of insolvency proceedings (CIRP). The bank was the sole member of 'Committee of Creditors' (CoC).
In pursuance to an advertisement, seven entities expressed interest in submitting a resolution plan. Ultimately, only one -- M/s. Khandesh Roller Floor Mills --was considered qualified and the resolution plan was received on June 11, 2018.
The resolution plan was approved by the CoC and an earnest money of Rs 50 lakhs was deposited by Khandesh besides a bank guarantee of Rs 95 lakh to show its bonafide.
While on the one hand the Resolution Professional submitted the Resolution Plan before the NCLT for approval, on the other hand, Satyanarayan Malu, one of the Director of the suspended board of S B M Paper Mills, was carrying a parallel negotiation with the Allahabad bank and offered it a one-time settlement offer of Rs 18 crore of which Rs 1 crore was deposited in a no-lien account.
Amidst all this, Khandesh expressed its desire to withdraw the Resolution Plan leaving only the option of liquidation with the CoC.
While Malu and the Bank argued that if considered commercially, it is prudent not to object the withdrawal of the petition, the Resolution Professional opposed the plea for withdrawal of the resolution plan.
The Resolution Professional opposed the request of withdrawal of the plan primarily on the ground that granting such a prayer may be in contradiction of the provisions of the Insolvency Code.
To resolve the case, the first question that the Tribunal answered was:
Whether an Applicant who has filed a petition u/s 10 is entitled to withdraw its own petition u/s 12A of the Code, especially when the said applicant has furnished the impugned Petition(CP 1362/2018) and now offering a onetime settlement as a Director in the suspended management of the Debtor Company.
In answering this question, the Tribunal said, the Laws governing financial transactions must not be static due to one of the fundamental reason that the economic condition of the society keeps on fluctuating depending upon the government policies and market conditions.
"With modesty I put my view that a golden rule of interpretation of such statute is to subscribe a 'creative interpretation'. However, hastened to add that a "Laxman Rekha" is to be drawn while interpreting the provisions of a Law so that the main Legislative intent be not disturbed. A purposeful interpretation, also termed as "purposive interpretation" is sometimes more helpful to redress the grievance, so therefore preferred from literal interpretation," the Tribunal said.
"The first reaction during the course of hearing of this Bench was that how it is justifiable on the part of an applicant who has moved a Petition u/s 10 to declare itself insolvent at one point of time and thereafter at a later stage suo-moto seeking permission for withdrawal of the said Petition?" the Tribunal noted.
The Tribunal, however, held the application for withdrawal maintainable as it noted, "this application is not a simplistic withdrawal application but it is coupled with a proposal of onetime settlement". The CoC has only one Financial Creditor i.e. Allahabad bank who has examined the pros & cons of this application. The CoC/the Allahabad Bank has also compared the proposal made in the Resolution Plan submitted for consideration. Undisputedly, onetime settlement offer is more economically advantageous to the Bank than the offer made through Resolution Plan (of Rs 12.5 crore).
"…it is hereby concluded that the proposal of this Applicant for onetime settlement is in the benefit of this Corporate Debtor for its revival along with all the stakeholders," it held.
The Tribunal, however, discouraged such practice as it said, "This Code shall not be made a tool for deferment of payment of liabilities which ought to happen due to declaration of "moratorium". I, therefore, take a conscious decision to impose a cost of litigation on the Corporate Debtor of Rs 5 lakh to be paid to MCA/NCLT…"
Withdrawal of Resolution Plan; Liquidation vis-à-vis One-Time Settlement
On the resolution applicant seeking permission to withdraw the Resolution Plan, the Tribunal remarked, "To my knowledge, this has happened for the first time in the two and half years (Approx.) that a Resolution Applicant is withdrawing a Resolution Plan which is approved by the CoC with majority vote".
The Tribunal was also faced with the argument that due to the unexpected and unprecedented development on the part of the Resolution Applicant, the CoC as well as the RP have been put in a strange situation at par with a situation when there is no Resolution Plan available which automatically leads to 'Liquidation'.
It, however, weighed whether a Liquidation is beneficial vis-à-vis One- Time Settlemet Proposal and noted, "The parties present before me, especially the Bank, is not at all ready for Liquidation of the assets of the Debtor Company, naturally so, due to lower Liquidated value of all those assets".
Since it had already allowed the withdrawal of the plea for insolvency proceedings, this plea for withdrawal of resolution plan was also allowed but with cost as other competitors who had submitted their Resolution Plan were deprived of their right of participation in the re-structuring of Corporate Debtor's financial position.
As a cost to discourage such practice, the Resolution Professional was directed to retain Rs 25 lakh of the total earnest money of Rs 50 lakh deposited by the Resolution applicant.