Vijai Pratap Singh, Member - (1.) Shri Kuldeep Verma, insolvency professional, appointed in Insolvency Petition No. 16/KB/2017 has filed resolution plan under section 30(6) of the Insolvency and Bankruptcy Code, 2016 ('the Code') read with regulation 39(4) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ('CIRP Regulations'), as approved by the Committee of Creditors ('CoC') of Sree Metaliks Ltd. for approval of this Tribunal. It is stated in the report that the resolution plan was presented by Mr. Mahesh Kr. Agarwal to the CoC. It is further noted that another resolution plan was submitted by resolution applicant, SREI Equipment Finance Ltd. in the meeting of CoC convened and held, by the relevant provisions of the Code and CIPR Regulations on 11th October, 2017.
(2.) It is further stated in the report that all the financial creditors (representing 100 per cent of the total claims submitted), who had filed the claims were present through their authorised representatives. CoC approved the resolution plan submitted by Mr. Mahesh Kr. Agarwal by 78.53 per cent of the voting share of the financial creditors of Sree Metaliks Ltd. It is further contended that in the meeting of the CoC, SREI objected to the resolution plan by Mr. Mahesh Kumar Agarwal. Sri Mahesh Agarwal also submitted an addendum to its resolution plan. CoC agreed to consider the addition provided by Mr. Mahesh Agarwal.
(3.) It is also stated in the Report that SREI objected to the resolution plan of Mr. Mahesh Kumar Agarwal on various grounds and after that Mr. Mahesh Kumar Agarwal sought modifications in his resolution plan. The CoC approved the resolution plan submitted by Mr. Mahesh Kumar Agarwal with 78.53 per cent voting share. The following submissions have been mentioned in the objection submitted by SREI. 1. A corporate debtor cannot be the resolution applicant under the Code for its insolvency resolution 1.1 The management of Sree Metaliks Ltd., the corporate debtor in question ("corporate debtor") got automatically vested in the interim resolution professional, and the power of the Board of directors got suspended and vested in the resolution professional. 1.2 A corporate debtor who has been referred for insolvency resolution and whose management gets vested in the resolution professional and whose Board of directors remain suspended, cannot be allowed to submit a resolution plan. The objector has placed reliance on the recent judgment of the hon'ble Supreme Court in the case of Innoventive Industries Ltd. v. ICICI Bank, 2017 140 CLA 39 (SC) wherein it is held that: "Once an insolvency professional is appointed to manage the company, the erstwhile directors who are no longer in management, obviously cannot maintain an appeal on behalf of the company." 1.3 The corporate debtor is not entitled to take any step, whether it is filing an appeal before a court of law or proposing a plan before the resolution professional. In the present case, the submission of the said plan by the corporate debtor is nothing but a case of the erstwhile directors still acting for and on behalf of the corporate debtor in spite of the fact that they having been denuded of all their powers and authorities as directors of the corporate debtor and therefore the mischief of the above judgment is squarely applicable in the case of the said plan. It is submitted a corporate debtor cannot act as a resolution applicant under the Code for its insolvency resolution. Such submission of the said plan by the corporate debtor itself is in clear violation of the provision of section 30(2)(e) of the Code for being in contravention of the Code itself. 1.4 The resolution professional is not empowered under the Code to submit a resolution plan prepared by the resolution professional himself, the said plan can also be viewed as a resolution plan prepared by the resolution professional himself. 2.2 SML has entered into firm arrangements with two mining contractors/corporates of Odisha, viz., Triveni Earth Movers (P.) Ltd. and Ahluwalia Mines, who have agreed to support SML in its revival plans. For this purpose, the above two mining contractors have constituted on SPV company as their joint venture. This PV will enter into a long-term mining operations contract with SML. The SML plan then goes on the recording that: "They will be making the required investments in the mines in the form of required equipment, the creation of infrastructure as well as assisting the company in getting various approvals, etc., and also financially - i.e., the cost required for this purpose." 2.3 It is, thus, apparent that the mines shall not only be operated, but all such operations, equipment and infrastructure shall also be financed by third parties. The SML plan proposes something which is blatantly in contradiction to the rule 24(b) of the Minerals (Other than Atomic and Hydro Carbons Energy Minerals) Concession Rules, 2016 and, therefore, squarely attracts the mischief of section 30(2)(e) of the Code. The SML plan proposes something which is not only illegal but will also put the entire operations of SML in jeopardy in case the State Government concerned decides to terminate the mining leases. 3. A resolution plan that was rejected by CoC cannot be resubmitted for fresh consideration of COC 3.1 From the minutes of the 8th meeting held on 25th September, 2017, it is amply clear that the said SML plan was rejected. The same will be evident from the recording of the minutes which is stated hereinbelow for your ready reference. "That COC has rejected the plan submitted by him in the current form and non-clarity on the mining contractor agreement and CEC observations in the past for such mining contractors and non-transparency by corporate debtor during CIRP process and lack of trust/confidence on Mr. Mahesh Kumar Agarwal." 3.2 There is no provision in the Code and the rules and regulations framed thereunder, that a rejected resolution plan can be resubmitted for new consideration and voting when the lacunae for which the plan was rejected continues to be there in the plan. Resubmission of a rejected plan is violative of IBC as it smacks of undue and unreasonable favour being meted out to the proposer of the said SML plan vis--vis other resolution applicants. 4. The SML plan sought to classify secured creditors in two classes on erroneous and illegal assumptions and presumptions in gross violation of the Code. 4.1 Some of the secured creditors have been classified as Class A secured creditors and have been made eligible for more favourable treatment. Such financial creditors are forming a part of a consortium, and they have a purported first pari passu charge on the fixed assets/current assets of SML. Another set of secured creditors have been classified as Class B secured creditors on the pretext that such creditors do not have a first pari passu charge on the fixed assets/current assets. Based on this classification the SML plan proposes a reduction of debts to the tune of 25 per cent for the so-called Class A lenders, whereas the reduction proposed for so-called Class B creditors, where SREI's debts have been included, is to the tune of a whopping 50 per cent. The rationale for such a classification, as stated in the said SML plan, is as under: 'These class "A" secured creditors represent the financial creditors who were forming part of the Consortium and are having a first pari passu charge on the fixed assets/current assets of the company (excluding the assets/machinery charged explicitly to the lenders against such machinery/vehicles). Class "B" secured creditors represent those secured creditors not forming part of the consortium, and who are not having a first pari passu charge on the fixed assets/current assets of the company but who are either having specific exclusive charge on the machineries/equipments funded by them or certain other securities like pledge of shares and/or second charge on the fixed assets of the company. In the event of liquidation, the secured creditors having the first charge on the fixed asset block of the company would exercise the SARFAESI rights available to them and in that event, except for other secured creditors having a specific charge on the machinery/equipment available with them as security, and would realise only the liquidation value of such security available, no other creditors either financial or operational would get any amount through the waterfall arrangement. On this logic, the treatment proposed to be accorded to the different class of secured creditors regarding crystallisation of the settlement amount is also different as elaborated subsequently in the proposal.' 4.2 The events that may unfold later at liquidation stage (Chapter III of Part II of Code) cannot be taken into account at an earlier resolution stage ('CIRP stage') (Chapter II of Part II of Code). The Code does not provide for any classification or priority or differential treatment among the secured creditors at the CIRP stage. All secured creditors must be treated equally so far as CIRP process envisaged in Code is concerned. The said SML plan erroneously presumes that if SML were to go into liquidation, it would be logical to assume that Class A secured creditors would opt for exercising their SARFAESI rights and based on this logic and presumption the liquidation value of our debt, if SML were to go to liquidation, has been purportedly shown as Rs. 20.80 crore, which is allegedly equal to the liquidation value of the assets hypothecated to us. At liquidation the Code provides two options to secured creditors; either realise the security interest in terms of section 52(1)(ii) or relinquish the security in terms of section 52(1)(a). But the said SML plan, by presuming that Class A secured creditors would opt for section 52(1)(b) as their option at liquidation, decides the payment mechanism to financial creditors. Therefore, all secured creditors must be deemed to have relinquished their securities and are to be treated as a single class in terms of section 53(1)(b)(ii). As such, the liquidation value of our debt cannot be deemed to be only the liquidation value of the asset charged to them but shall be a value that they are eligible to receive under section 51(1)(b)(ii). 4.3 The contention of the corporate debtor that it has classified the creditors by quality of securities held by such creditors is on the face of its illegal and arbitrary as no such differentiation by "quality of securities" is known in law or equity. 5. The SML plan classifies secured creditors by consortium arrangement in gross violation of the Code After Edelweiss, SREI is the second largest voting shareholder in the COC constituted under the Code. Even with so much of exposure, SREI has been placed behind JM, Peagasus, OBC and ICICI Bank whose aggregate outstanding are far less than its outstanding debt. With bare Rs. 5.81 crore outstanding, Peagasus has received a better treatment under the said SML plan than SREI. All these favours have been showered on these so-called Class A creditors for the reason that they together form a consortium. Section 24(6) of the Code points at a notional disbanding of any consortium arrangement so that each financial creditor stands on his own feet and be a beneficiary by solely depending on his financial debt outstanding. 6. The SML plan grossly violates the objects of the Code and creates a class within a class 50 per cent haircut on their claim while allowing Class A secured creditors a 25 per cent hair-cut and further equity shares have been proposed to be provided only to Class A term lenders, i.e., Edelweiss, JM Financial and OBC. The sole motive for such classification is to deprive a particular class of secured creditors at the cost of unjustly enriching the other class of secured creditors. SML plan has been prepared on a discriminatory policy. It has to bear in mind that in a resolution process, the corporate debtor is always treated as a going concern. The question of fixed assets as security comes in only when a corporate debtor has gone into liquidation. The SML plan discriminates against few lenders and particularly SREI by providing a lower share in the cash flows of the company and at the same time offers a more significant percentage of the cash flows to some of the lenders like Edelweiss. Moreover, lenders who have financed working capital are getting a larger payout (i.e., 75 per cent) compared to the lenders who have done equipment/asset finance (i.e., 50 per cent). As per the registered valuer, the valuation of current assets is Rs. 12.08 crore against working capital outstanding of Rs. 235.46 crore as per the SML plan. From the above, it is clear that the said SML plan suffers from arbitrariness, whimsicality and unreasonableness. It tends to create a class within the class which is not permissible under the law. The act of arbitrarily creating a class within a category violates the right to equality and, therefore, violates the provisions of section 30(2) of the Code. 7. The SML plan is a sinister design to transfer the operations of SML to the investor proposed in the SML plan. The erstwhile management has kept the resolution professional and the COC in the dark about certain vital transactions in gross violation of Code. The resolution professional himself doubted certain things in the SML plan but subsequently agreed to put it for voting without any material evidence that all past doubts stood cleared. The SML plan in its entirety does not provide for any clarifications on the source of funds. Such agreements have been entered into by and between the said erstwhile promoters and third parties well before the mining lease had even been granted to the corporate debtor. In the instant case, the former promoter/managing director of the corporate debtor Mr. Mahesh Agarwal has entered into agreements with third parties behind the back of the resolution professional. He has also allowed third parties to enter the various sites and offices of the corporate debtor without taking the resolution professional into confidence. Mr. Mahesh Agarwal, none of the officers of the corporate debtor, has ever cooperated with you. There are agreements that have been executed by third parties regarding the functioning of the mining lease almost a year before the mining lease had even been granted. The SML plan has introduced an investor who has made several communications to the erstwhile promoter/managing director but not a single communication has been addressed to the resolution professional. Also, the said prospective investor has made direct/indirect investments of INR 20 crore which has come to light at the fag end of the insolvency resolution process. The terms for such fund infusion has also not been disclosed to the resolution professional and the present management of the corporate debtor. Further, the view in the COC is that the transaction for iron ore mine is an extortionate transaction and RP has assessed the same. RP has expressed reservations about handing over the company back to the same management who is responsible for this proceedings in the first place. Since RP has questioned the credibility of the investor stated in the SML plan. If press reports are to be believed such concerns cannot be brushed aside. It is clear from minutes that this investor has directly financed SML for obtaining mining lease. The commercial terms as stated by the investor refers to complete capture of the mines and the business entity of SML without even being an equity investor in SML. The mining, buying and selling activities of SML on the one hand and the credit terms on the other shall be completely controlled by such investor and his related parties with no scope for any third-party participation. SML's end to end cash flow will thus be controlled by the prospective investors and his associated parties all the while claiming to be an unsecured creditor. The SML plan not only renders the mines leased to SML as a captive for the sole and exclusive usage by such investor and its related parties but also the organisational, operational and business aspect of SML is intended to be kept hostage by the prospective investor and its associated parties by abusing this instant insolvency resolution process. 8. The SML plan fails to provide calculation and source to pay liquidation value in violation of Code 8.1 It is also contended that SML plan suffers from vagueness in the absence of details. No specific source of funds has been declared in the SML plan in gross violation of regulation 38 of the CIPR Regulations. The said SML plan does not take into account the value of mining lease, which is Rs. 37.40 crore, on the erroneous assumption that in the event of liquidation the mining lease agreement may be terminated and the buyer of the assets of SML may not have the right to continue the mining operations. As per the present developments in the mining regulations, a mining lease for captive use has been made transferable, subject only to prior approval of the State Government concerned. The said SML plan excludes the mining lease value by presuming that such consent may not come. It is further contended that the fund of Rs. 40 crore as proposed in the said SML plan is insufficient to cater the dissenting financial creditors and operational creditors. There is no clarity as to how and when such funding will be infused into SML. Only a sum of INR 4 crore is proposed to be infused into an escrow account and that too with conditions. Such a paltry amount will not even be enough to cover the costs of this Insolvency Resolution Process. The keys of SML will be handed back to the same management/promoter/managing director. Mainly when statutory dues have been piling up at unmanageable levels, and all such regulatory authorities have indicated taking appropriate action after the moratorium period is over. Resolution professional has failed to confirm that the SML plan conforms to section 30(2) of the Code and without such confirmation the SML plan cannot be submitted for voting by COC. We have heard the arguments of learned counsel representing the resolution professional and the argument of the learned counsel of the financial creditor, SREI Equipment Finance Ltd. Shri Kuldeep Verma, resolution professional, has submitted his resolution plan under section 30(6) of the Code read with regulation 39(iv) of the CIRP Resolutions which is approved by the CoC, Sree Metaliks Ltd. Shri Kuldeep Verma has also annexed the copy of the resolution plan along with the details, which shows that the resolution plan submitted by Mr. Mahesh Kumar Agarwal has been approved by the CoC with 78.53 per cent of the voting share of the financial creditors of Sree Metaliks Ltd. The learned Resolution Professional has given the details of vote share which shows that 21.47 per cent of the creditors voted against the resolution plan and 78.53 per cent of the creditors voted in favour of the resolution plan. Section 31(1) of Code provides that if the Adjudicating Authority is satisfied with the resolution plan as approved by the CoC under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by an order approve the resolution plan, which shall be binding on the corporate debtor and its employees, members, creditors, coordinators and other stakeholders involved in the resolution plan. Conditions given in section 30, sub-section (2) are given below: 30. (2) The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan- (a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the repayment of other debts of the corporate debtor; (b) provides for the repayment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53; (c) provides for the management of the affairs of the corporate debtor after approval of the resolution plan; (d) the implementation and supervision of the resolution plan; (e) does not contravene any of the provisions of the law for the time being in force; (f) conforms to such other requirements as may be specified by the Board. Resolution professional has submitted a resolution plan approved by the CoC with more than 75 per cent of voting share and main objection against the resolution plan is that the corporate debtor himself cannot be a resolution applicant under the Code.;