Insolvency & BankruptcyNational Company Law Tribunal & NCLATNo back-door Entry for Defaulters

September 24, 20200
National Company Law Appellate Tribunal, New Delhi
Bank of Baroda Vs. Mr. Sisir Kumar Appikatla
[C.A. (AT) (Insolvency) No. 579 of 2020] | Date: 20.07.2020
M/s. Priya Trading Company (“Operational Creditor) has initiated the Corporate Insolvency Resolution Process under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“Code”) against the Veda Biofeuel Ltd. (“Corporate Debtor”).
Two prospective Resolution Applicants – M/s. Orion Ferro Alloys Pvt. Ltd. and Mr. Madhusudhan Raju Chintalapati (“MRC”) submitted Resolution Plans.
Thereafter, MRC entered into an agreement with former Managing Director and Promoter of the Corporate Debtor, P. Vijay Kumar (“PVK”) for investment and restructuring of shareholding pattern. Pursuant to the Agreement, MRC was allotted 50 % shareholding, PVK was allotted 30.81 % of shareholding and remaining percentage of shareholding was to be allotted to four other minor shareholders.
Further, PVK and MRC entered into a settlement Agreement dates 6 February 2020 with the Operational Creditor for withdrawal of application under Section 12 A of the Code.
However, the Committee of Creditors approved the Resolution Plan in the nature of Restructuring Plan submitted by MRC with 96.39 % of voting share.
The Resolution Professional submitted the approved Resolution Plan before the Adjudicating Authority for approval.
The NCLT observed that the Corporate Debtor had become insolvent and had defaulted in repaying its debt obligations under the management of PVK. It opined that since the management could not manage the affairs of the Corporate Debtor, resulting it insolvent, they cannot be permitted to contribute further for management of the Corporate Debtor. It noted that PVK had reduced it shareholding from 45.32% to 30.81%.
Further, the Committee of Creditors did not consider the Settlement Agreement for withdrawal before approving the Restructuring Plan as Resolution Plan.
The Tribunal held that the Restructuring Plan is not a Resolution Plan in terms of Section 30 of the Code, regardless of the fact that it has been submitted by a Resolution Applicant as the former managing director cannot be allowed a backdoor entry through the Restructuring Plan in disguise of a Resolution Plan. The Tribunal instead passed an order for liquidation under Section 33 (1) (b) of the Code.
Thus, the Appeal has been filed against the rejection of the Resolution plan submitted by the Resolution Professional under Section 31 of the Code.
Whether the restructuring plan projected as a resolution plan and approved by the Committee of Creditors could be termed as a Resolution Plan within the ambit of Section 30 of the Code?
The Appellant Tribunal firstly reiterated the settled position of law that the approval of a resolution plan is dependent on numerous factors including – feasibility, viability, financial matrix, distribution mechanism etc. The business decision is finally taken up by the Committee of Creditors and the Tribunal cannot interfere with its commercial wisdom.
However, the Tribunal is empowered to interfere to ensure that the successful Resolution Applicant is not ineligible to submit Resolution Plan under Section 29A and that the approved Resolution Plan complies with the mandate of Section 30(2) of the Code.
It is amply clear from the Section 29 A of the Code that a person who is the promoter or in management or in control of the Corporate Debtor during the implementation of the Resolution Plan falls within the expression ‘connected person’.
In this regard, the Tribunal relied on the adjudication of the Supreme Court in the case of Chitra Sharma vs. Union of India, WP (Civil) No. 744 of 2017, decided on 09 August 2018, and held that –
“Persons who contributed to default of company with their misconduct have to be excluded from submitting a Resolution Plan or acquiring the assets of the Corporate Debtor when pushed into liquidation. An unscrupulous person associated with the management of the Company who pushes the Corporate Debtor into financial crisis leading to default in its repayment obligations towards creditors cannot be permitted to gain control of the management of the Corporate Debtor through backdoor viz by entering into an agreement with an investor in the form of a settlement and then submitting a Restructuring Plan masquerading as a Resolution Plan while retaining the majority shareholding and without divesting his effective control in the management.”
The Tribunal concluded that the Restructuring Plan projected as the Resolution Plan cannot be construed to be Resolution Plan under Section 30 of the Code. A Resolution Plan has to mandatorily comply with requisites of Section 30 (2) of the Code.
In the instance case, the PVK has only used MRC to wrongfully gain control over the Corporate Debtor, where in fact, PVK is the person because of which the Corporate Debtor became insolvent.
The Code has defined resolution plan as a plan for insolvency resolution of a corporate debtor as a going concern. Further, Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 permits restructuring of a corporate debtor by way of merger/consolidation or sale/transfer of assets of the corporate debtor pursuant to the resolution plan.
However, through amendment it has been clarified that a resolution plan may also propose restructuring of the corporate debtor, including by way of merger, amalgamation and demerger, thereby clearing the doubts on the possibility of restructuring of a corporate debtor pursuant to a resolution plan.
Nonetheless, the defaulting person that lead the Corporate Debtor in the position of being insolvent, can never be permitted to take advantage of its own wrongdoing by taking a back door through Restructuring Plan in disguise of Resolution Plan. Whilst the Code provides adequate effective mechanism to safeguard the dying Corporate Debtor, it also ensures that no defaulters takes undue advantage. 
AMLEGALS is a multi-specialised law firm. We would love to hear your views, queries, feedback and comments on or

Leave a Reply

Your email address will not be published. Required fields are marked *

Current day month ye@r *

© 2020-21 AMLEGALS Law Firm in Ahmedabad, Mumbai, Kolkata, New Delhi, Bengaluru for IBC, GST, Arbitration, Contract, Due Diligence, Corporate Laws, IPR, White Collar Crime, Litigation & Startup Advisory, Legal Advisory.


Disclaimer & Confirmation As per the rules of the Bar Council of India, law firms are not permitted to solicit work and advertise. By clicking on the “I AGREE” button below, user acknowledges the following:
    • there has been no advertisements, personal communication, solicitation, invitation or inducement of any sort whatsoever from us or any of our members to solicit any work through this website;
    • user wishes to gain more information about AMLEGALS and its attorneys for his/her own information and use;
  • the information about us is provided to the user on his/her specific request and any information obtained or materials downloaded from this website is completely at their own volition and any transmission, receipt or use of this site does not create any lawyer-client relationship; and that
  • We are not responsible for any reliance that a user places on such information and shall not be liable for any loss or damage caused due to any inaccuracy in or exclusion of any information, or its interpretation thereof.
However, the user is advised to confirm the veracity of the same from independent and expert sources.