NCLT Hyderabad Dismisses Resolution Plan for Non-Compliance with CIRP Regulations

NCLT Hyderabad Dismisses Resolution Plan for Non-Compliance with CIRP Regulations

The Hyderabad Bench of the National Company Law Tribunal (NCLT), consisting of Dr. Venkata Ramakrishna Badarinath Nandula (Judicial Member) and Charan Singh (Technical Member), recently deliberated on a petition brought forward in the case of Asset Reconstruction Company (India) Limited v Viceroy Hotels Limited. In their ruling, the NCLT rejected the Resolution Plan proposed for Viceroy Hotels due to non-compliance with Regulation 36B 4(A) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations).

The Resolution Applicant had presented a Performance Bank Guarantee that was valid for six months. However, the implementation schedule outlined in the proposed plan spanned 675 days. The Bench determined that, as per the mandatory provision stated in Regulation 36B 4(A) of the CIRP Regulations, the Performance Bank Guarantee must remain valid for the entire duration of the plan implementation schedule. Since the resolution plan failed to comply with this essential legal requirement, the Bench based its rejection of the plan solely on this ground.

M/s Asset Reconstruction Company (India) Ltd., acting as the Financial Creditor, has filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), seeking the initiation of the Corporate Insolvency Resolution Process (CIRP) against Viceroy Hotels Limited, the Corporate Debtor.

On March 12, 2018, the Adjudicating Authority accepted the application and admitted the Corporate Debtor into the Corporate Insolvency Resolution Process.

The Resolution Applicant, Anirudh Agro Farms Limited (RA), presented a resolution plan for the Corporate Debtor, which received approval from the Committee of Creditors (CoC) with an overwhelming voting share of 95.82 percent. As per the terms outlined in the Request for Resolution Plans (RFRP) document and Letter of Intent, the RA submitted a Performance Bank Guarantee of ₹16.85 crore to the Resolution Professional on November 10, 2022. It is important to note that the Performance Guarantee had a validity period of six months.

Under the Resolution Plan, the implementation schedule was set to span 675 days. According to Regulation 36B 4(A) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations), it was mandatory for the Performance Bank Guarantee to provide coverage for the entire period of the plan's implementation schedule, which in this case was 675 days.

The Resolution Professional submitted an application to the Adjudicating Authority, seeking approval for the Resolution Plan put forth by the Resolution Applicant (RA).

The relevant law under Regulation 36B 4(A) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 states: “The request for resolution plans shall require the resolution applicant, in case its resolution plan is approved under sub-section (4) of section 30, to provide a performance security within the time specified therein and such performance security shall stand forfeited if the resolution applicant of such plan, after its approval by the Adjudicating Authority, fails to implement or contributes to the failure of implementation of that plan in accordance with the terms of the plan and its implementation schedule.”

The Bench drew support from the Supreme Court's ruling in the case of M.K. Rajagopalan vs Dr. Pariasamy Palani Gounder & Another (2023 Live Law (SC) 403) during its judgment.

The Supreme Court underlined that while the decisions of the Committee of Creditors (CoC) are usually respected for their commercial judgment, this should not lead to disregarding substantial deficiencies in the decision-making process of the CoC, particularly when it fails to consider the application of relevant legal provisions in force at that time.

During the proceedings, the Bench noted that the payment obligations outlined in the Resolution Plan were scheduled to be fulfilled within 675 days. However, it highlighted that Regulation 36B (4A) of the CIRP Regulations requires the Performance Bank Guarantee to cover the entire Plan Implementation Schedule, which was not the case in this instance. When the Resolution Professional was questioned about ensuring compliance with Regulation 36B (4A), the Resolution Applicant (RA) submitted a Clarificatory Undertaking to address the matter.

The Clarificatory Undertaking put forth by the Resolution Applicant (RA) outlined its proposal for payment to all creditors in five tranches, in accordance with the approved resolution plan. It further stated that if the RA fails to make payments as per the agreed terms and timelines in subsequent tranches, any payments made in prior tranches would be subject to forfeiture. The purpose of this provision was to ensure that the RA fulfils its payment obligations as per the Resolution Plan's agreed terms and timelines.

The Bench expressed the opinion that a unilateral clarificatory undertaking from the Resolution Applicant (RA) cannot be considered as compliance with the mandatory Regulation. The reason for this is that such a clarificatory undertaking cannot serve as a means to extend the validity of the Bank Guarantee beyond the initial six-month period starting from November 10, 2022.

“Therefore, it is not in doubt that the Performance Bank Guarantee furnished on 10.11.2022 by the Successful Resolution Applicant had expired by afflux of time specified therein, especially in the absence of any record placed before this Tribunal evidencing extension of Performance Bank Guarantee beyond the initial six months period. Therefore, the ‘Performance Bank Guarantee’ from the Successful Resolution Applicant being non-est, in the eye of law as on date, non-compliance of the mandatory Regulation 36B (4A) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 is apparent. In that view of the matter and following the ruling of the Hon’ble Supreme Court of India, in M.K. Rajagopalan vs Dr. Pariasamy Plalani Gounder & Another (supra), we have no alternative but to reject the Resolution Plan on the ground of noncompliance of the statutory provision,” the NCLT Bench held in its order.

The Bench further noted that the Resolution Applicant (RA) had been granted the liberty to pursue any available legal remedies regarding the matter at hand.

The Bench, thus, decided to reject the Resolution Plan submitted by the Resolution Applicant (RA) for the Corporate Debtor. However, instead of ordering the liquidation of the Corporate Debtor, the Bench has instructed the Resolution Professional to continue with the Corporate Insolvency Resolution Process (CIRP) and issue a fresh Form-G.