Unfair and inequitable Resolution Plan of Lotus City can’t be accepted, NCLT

The National Company Law Tribunal (NCLT), Division Bench, New Delhi, has directed the Resolution Professional of the debt-ridden real estate firm M/s Three C Homes Pvt. Ltd. to take requisite steps to initiate Liquidation proceedings, after the Resolution Plan proposed by the sole Resolution Applicant, i.e. M/s Ace Infracity Developers Pvt. Ltd., was rejected for being non-compliant and contrary to the provisions of Insolvency Bankruptcy Code, 2016 (IBC) & CIRP Regulations, 2016.

Facts

The NCLT had directed to initiate insolvency proceedings against the Corporate Debtor, M/s Three C Homes Pvt. Ltd., on September 06, 2019 over a petition filed under Section 7 of the IBC by a homebuyer (Financial Creditor), Mr. Arun Kumar Sinha. Notably, the Committee of Creditors (CoC) constituted only of homebuyers (‘creditors in a class’) of the Corporate Debtor.

Pursuant to publication of invitation for expression of interest by the RP, only one resolution plan, i.e. by M/s Ace Infracity Developers Pvt. Ltd., was put for consideration before the CoC. The CoC consisting 100% of homebuyers approved the resolution plan by a majority vote and upon CoC’s approval of the Resolution Plan, the Resolution Professional approached the Adjudicating Authority. In an attempt to highlight the substantive and procedural irregularities demonstrated by the Resolution Professional, Authorised Representative and the Resolution Applicant during CIRP, certain Homebuyers being Financial Creditors in a class led by Mr. Sandeep Goel, moved the Adjudicating Authority by way of an application under Section 60(5), IBC, seeking corrective measures in accordance with law, whilst expressing their dissent towards the approval of a non-compliant Resolution Plan.

Findings

The Adjudicating Authority weighed the objections raised by the dissenting Financial Creditors and made the following observations, classified broadly on four aspects:

  • The treatment of Homebuyers by the Resolution Applicant was inequitable, unjust and highly objectionable.

The Tribunal while examining the viability and suitability of the Resolution Plan found that that there is huge difference of 80.23% between the actual Liquidation Value for the Corporate Debtor and the amount of funds being proposed by the Resolution Applicant by way of fresh infusion. In the present case, the Liquidation Value for the Corporate Debtor was estimated around Rs. 480.70 Crores, against which the Resolution Plan approved by the CoC provided for only an amount of Rs. 180.34 Crores. Even, against the sum of Rs. 180.34 Crores, the Resolution Applicant was obliged to bring in only Rs. 95 Crores by way of fresh infusion of funds, spread over a period of 2 years, and the rest Rs. 85 Crores was to be contributed by the Financial Creditors, i.e. Homebuyers themselves. The Tribunal while expressing its displeasure towards such an equation noted that by way of such proposal, the Resolution Applicant is ‘taking away’ the Corporate Debtor at a value for a meagre sum when compared to the actual Liquidation Value.

  • The Resolution Plan was not in compliance of the provisions of the Code and specifically the amended Regulation 16A (9) of the CIRP Regulations, 2016, which came into force on 07.08.2020.

The amendment to the Regulation 16A (9) of the CIRP Regulations, 2016,  provisioned that the Authorised Representative was to circulate the agenda to creditors in a Class scheduled for voting and seek their preliminary views on any item in the agenda. Further, that the Financial Creditors shall also have an opportunity to submit their preliminary views and such views shall not be construed as voting instructions by the creditors to the Authorised Representative. In total disregard to the amended Regulation in force, the Resolution Professional & Authorised Representative chose to only adhere to the former provision.

In the present case, the sole Resolution Applicant filed its Resolution Plan on 03.08.2020. In a swift transition, on 04.08.2020, the Resolution Professional issued notice for holding the 5th CoC meeting consisting of the agenda primarily to approve the Resolution Plan scheduled for 10.08.2020. Since the Class of Homebuyers, being represented through an Authorised representative. Notably, the pre-CoC meeting voting on the agenda items of the 5th CoC meeting, including voting for approval of the Resolution Plan submitted by M/s Ace Infracity Developers Pvt. Ltd. took place for a period of only 24 hours from 08.08.2020 to 09.08.2020. Pertinently, the proposed Resolution Plan was summarily declared to be ‘compliant’ & ‘feasible’ by the Resolution Professional at the time of stating the agenda items on 04.08.2020 itself, i.e. within one day of receipt of the resolution plan.

The Resolution Professional contended that the notice for the CoC meeting was issued before the amendment was introduced and placed reliance on the position that every statute or amendment is to apply prospectively, unless it is stated to be retrospective. However, the Tribunal negating the contention of the Resolution Professional, held that since the amendment relates to a provision concerning to procedure, an amendment in procedural law always has retrospective effect unless there is a specific provision barring its retrospective operation. The Tribunal further noted that the even after the introduction of the amended regulation coming into force on 07.08.2020, three meetings of the CoC were conducted thereafter and the amended procedure was not followed. Resultantly, no effective participation was to be found of the Authorised Representative of the Homebuyers in the voting process conducted for the approval of the Resolution Plan.

  • The Resolution Plan was found to be in violation of Regulation 38(3)(a) of the CIRP Regulations, as it fails to demonstrate facets that addresses the ‘cause of default’.

The NCLT observed that the proposed socio-economic arrangement in the resolution plan, to deal with the ‘cause of default’ being Yamuna Expressway Development Authority’s (YEIDA) everlasting dispute with farmers belonging to the vicinity of the Corporate Debtor’s project ‘Lotus City’ & ‘Parkspace’, were unilateral and unsustainable. The Resolution Plan sought to address the ‘cause of default’ by way of developing the adjoining village ‘Salarpur’ and also developing community facilities in consolation with YEIDA and local panchayat by investing Rs. 15 Crores for such development, to satisfy the demands of farmers. The Tribunal observed that the Resolution Plan overlooks the fact that YEIDA and other authorities failed to support the Corporate Debtor when the farmers were creating law and order problem and at the outset YEIDA had raised a demand of Rs. 71.66 Crores to be paid by the Corporate Debtor. Consequently, the Farmers will not forego their claim in exchange of a meagre sum to develop the adjoining village, and hence the Resolution Plan fails to address the ‘cause of default’.

  • The Resolution Plan is not in violation of Section 30(2)(b) of IBC, as Financial Creditors in a Class  (Homebuyers) are not entitled to a guaranteed sum under IBC

The dissenting Financial Creditors/Applicants relying on their categorization of Homebuyers as Financial Creditors, claimed rights under Section 30(2) (b) which guarantees payment of atleast the sum payable against the relevant entry in liquidation waterfall under Section 53 of the IBC, to dissenting Financial Creditors. However, the Tribunal rejected objection on this ground and held that IBC has not provided for a mechanism whereby creditors within a Class can be entitled to the guaranteed sums under Section 30(2)(b), under the heading of dissenting Financial Creditors, owing to the specific scheme of voting for creditors in a Class. The NCLT observed that individual vote of such creditor is not taken into account while deciding the final stance of the entire Class, and therefore the Tribunal held that the final vote represents the vote of each and every member of the Class.

NCLT’s Order

In light of the findings of the Tribunal in the present case, the non-compliant Resolution Plan submitted to the Adjudicating Authority was rejected and the application filed by the dissenting Financial Creditors was allowed with directions to the Resolution Professional to file an appropriate application seeking liquidation order of the Corporate Debtor at the earliest. 

Conclusion

In our opinion, the NCLT has come to the rescue of homebuyers, who had without knowledge of complete financial facts approved the resolution plan. The buyers should choose not to go for liquidation and they should approach the NCLT seeking revival of the CIRP an invite better resolution applicants and plans.

Remarks

It’s worth highlighting that the CIRP was only in the first phase of six months and the Resolution Professional should have made an attempt to at least invite one more resolution applicant so that there is healthy competition. However, the RP did not make an effort on that front and put this only resolution plan to vote before the COC. The COC voted yes to the plan, possibly to avoid liquidation, and without understanding the complete financials of the company.

In the case of Granite Gate Properties Pvt Ltd (Lotus Panache), the homebuyers would have voted for an unfair resolution plan if the association would not have stepped in. Therefore, it is our advice that associations across projects should therefore be vigilant and ensure that they work in the interests of home buyers and get a fair resolution plan for the homebuyers, as homebuyers rely heavily on the recommendation of association and do not look at the merits of a plan in detail themselves believing that the association office bearers have already done so.

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