Creditors to set norms for evaluation of resolution plan: Chennai Bench, NCLT

By EDITORIAL TEAM INSOL INDIA Posted On : January 15, 2019

In Ajay Kumar Agarwal and Another vs M/S Ashok Magnetics Limited and Another, the prospective resolution applicants filed an application against the resolution professional of M/S Ashok Magnetics Limited (“Corporate Debtor”) with a prayer to issue directions to the resolution professional and the committee of creditors (“CoC”) to reconsider their decision of rejecting the resolution plan filed by the resolution applicants, who were the promoters of the Corporate Debtor. 

The resolution applicants had requested the resolution professional to give an opportunity to submit a resolution plan for revival of the Corporate Debtor, which was declined citing the provisions of Section 29A of the Insolvency and Bankruptcy Code, 2016 (“IBC”). 

The resolution applicants submitted that an application under Section 60(5) of the IBC was filed and the National Company Law Tribunal (“NCLT”) vide order dated August 31, 2018 had allowed the application holding that the Corporate Debtor is MSME and the resolution applicants being its promoters, are eligible to file the resolution plan. However, before the consideration of the resolution plan on merits, the CoC had raised following objections: 

  • Failure of the resolution applicant to submit the payment given under the expression of interest;
  • Ineligibility of the resolution application for submission of resolution plan under Section 29A of the IBC as the resolution applicant (Mr. Ankit Agarwal, one of the directors of M/S Ankit Ispact Private Limited) was identified as a willful defaulter by the Central Bank of India and the State Bank of India; and
  • Pendency of petition under Section 43/45 of the IBC filed by the resolution applicant on the ground that if such an application is decided in favour of the corporate debtor, it will add to the value of the resolution plan.

The NCLT, while opining that the CoC had rejected the resolution plan mechanically without application of mind, as there was no shred of evidence that the suitability and viability of the resolution plan had been considered on merits, made the following observations:

  • failure to deposit money given under the expression of interest is an insufficient ground for rejection of the resolution plan;
  • identification of the resolution applicant (Mr. Ajay Agarwal) as the willful defaulter was held to be a flimsy ground for rejection of the resolution plan. The NCLT relied on the fact that Mr Ajay Agarwal was merely a nominee director of M/S Ankit Ispact Private Limited and does not have any managerial control over the company and its day to day affairs, following the decision of the Supreme Court in Arcelor Mittal India Private Limited vs Sathish Kumar Gupta and Others, wherein it has been laid down that the expression ‘control’ under Section 29A(c) of the IBC denotes only positive control as contrasted with ‘management’, which shall mean de facto control of the actual management or policy decisions that can be or are in fact taken. 
  • A hypothetical situation of adding value to the resolution plan in case the application under Section 43/45 of IBC is decided in favour of the corporate debtor was held to be an invalid ground for rejection of the resolution plan.

Since the maximum period of the CIRP was over, the NCLT deemed it fit to reject the application for resolution and proceeded to pass a liquidation order. The head offices of the members of the CoC were directed to work out a ‘Standard Operating Procedure’ to be followed by the members of the CoCs for determining the suitability and viability of the resolution plans, so that the affairs of the CoCs could be regulated under the IBC regime.