NCLT Ahmedabad Remits Button Industries Resolution Plan to CoC Over Demerger Uncertainty and CIRP Cost Ambiguity
Introduction
The present judgment concerns an application filed before the Ahmedabad Bench of the National Company Law Tribunal under Sections 30(6) and 60(5) of the Insolvency and Bankruptcy Code, 2016, seeking approval of the resolution plan submitted in the Corporate Insolvency Resolution Process of Button Industries Private Limited. The NCLT remitted the resolution plan back to the Committee of Creditors for reconsideration after identifying concerns relating to the conditional demerger structure, ambiguity regarding CIRP costs, and insufficient disclosure about the financial capability of the Successful Resolution Applicant.
Factual Background
The Corporate Insolvency Resolution Process of Button Industries Private Limited commenced pursuant to a petition filed under Section 9 of the Insolvency and Bankruptcy Code, 2016. During the CIRP, the Committee of Creditors was constituted with Neurich Nutrifoods Limited as the sole unsecured financial creditor holding 100% voting share. A joint resolution plan was submitted by Wellfin Corporation and Madhav Solar Private Limited. The resolution plan was approved by the Committee of Creditors with 100% voting share.
A significant feature of the resolution plan was the proposed demerger of the “Precious Metal Division” of Madhav Solar Private Limited into the Corporate Debtor under Sections 230 to 232 of the Companies Act, 2013. The implementation structure of the plan was therefore linked with the proposed demerger arrangement.
Procedural Background
An application under Sections 30(6) and 60(5) of the Insolvency and Bankruptcy Code, 2016 was filed before the NCLT Ahmedabad seeking approval of the resolution plan approved by the Committee of Creditors.
The matter was heard by Judicial Member Chitra Hankare and Technical Member Dr. Velamur G. Venkata Chalapathy. Upon examining the plan and the accompanying documents, the Tribunal identified multiple deficiencies relating to the demerger structure, CIRP cost disclosures and the financial disclosures of the Successful Resolution Applicant. The Tribunal ultimately remitted the resolution plan back to the Committee of Creditors for reconsideration in light of its observations.
Issues
1. Whether the resolution plan could be approved when the proposed demerger structure lacked clarity regarding its implementation timeline.
2. Whether the Committee of Creditors had properly considered the conditional nature of the demerger while approving the resolution plan.
3. Whether the resolution plan sufficiently disclosed and accounted for the CIRP costs.
4. Whether the Successful Resolution Applicant had adequately demonstrated its financial capability and source of funds for implementation of the plan.
5. Whether the Resolution Professional had properly clarified the treatment of trade receivables and carry-forward losses reflected in the financial statements.
Contentions of Parties
The Resolution Professional sought approval of the resolution plan under Sections 30(6) and 60(5) of the Insolvency and Bankruptcy Code, 2016. It was submitted that the Committee of Creditors had approved the joint resolution plan submitted by Wellfin Corporation and Madhav Solar Private Limited with 100% voting share.
The plan envisaged demerger of the “Precious Metal Division” of Madhav Solar Private Limited into the Corporate Debtor under Sections 230 to 232 of the Companies Act, 2013. The applicants relied upon the commercial wisdom of the Committee of Creditors in approving the plan.
The Tribunal, however, raised concerns regarding the structure and implementation of the plan. Questions were raised regarding whether the proposed demerger would occur before or after implementation of the resolution plan and whether the approval of the plan itself was conditional upon the demerger.
The Tribunal also questioned the absence of specific disclosure regarding CIRP costs, the lack of a net worth certificate of the Successful Resolution Applicant, and the absence of disclosure concerning the source of funds for the proposed unsecured loan.
Reasoning and Analysis
The NCLT first considered the structure of the resolution plan and the proposed demerger arrangement. The Tribunal noted that a key component of the plan involved demerger of the “Precious Metal Division” of Madhav Solar Private Limited into the Corporate Debtor under Sections 230 to 232 of the Companies Act, 2013.
The Tribunal observed that the Committee of Creditors had approved the plan without considering whether the proposed demerger would take place before or after implementation of the plan. According to the Tribunal, this ambiguity constituted a material defect because approval of the resolution plan could not be made conditional upon an uncertain future event without clarity regarding implementation.
The Bench specifically held that such uncertainty could not form the basis of approval of the plan and that the Committee of Creditors was required to reconsider whether the proposed demerger formed part of the plan or constituted a condition precedent for implementation.
The Tribunal then examined the issue of CIRP costs. Although the Resolution Professional had stated that CIRP costs would be fully paid, the actual amount of such costs had not been specified. The NCLT found this lack of disclosure significant because CIRP costs occupy priority under the Insolvency and Bankruptcy Code and must be clearly identified and accounted for in the resolution plan.
The Tribunal therefore directed the Committee of Creditors to clarify whether the CIRP costs were included within the plan amount or were payable over and above the proposed amount. The Tribunal also directed that certification be obtained from the Successful Resolution Applicant specifying the precise breakup of CIRP costs as on the date of approval of the plan.
The NCLT further considered the financial capability of the Successful Resolution Applicant. The Tribunal noted that the SRA had failed to furnish a net worth certificate. Additionally, there was no adequate disclosure regarding the source of funds for the proposed unsecured loan contemplated under the resolution plan.
The Tribunal held that absence of such financial disclosures cast doubt upon the implementation capability of the Successful Resolution Applicant. Since successful implementation of a resolution plan is a critical consideration under the Insolvency and Bankruptcy Code, the Tribunal found that these deficiencies required reconsideration by the Committee of Creditors.
The Tribunal also directed the Resolution Professional to clarify the treatment of trade receivables and carry-forward losses reflected in the financial statements. According to the Tribunal, such disclosures were necessary for proper assessment of the viability and implementation of the resolution plan.
In light of these deficiencies, the Tribunal concluded that the resolution plan required reconsideration by the Committee of Creditors before it could be considered for approval by the Adjudicating Authority.
Decision
The NCLT Ahmedabad remitted the resolution plan of Button Industries Private Limited back to the Committee of Creditors for reconsideration. The Tribunal held that the Committee of Creditors had approved the plan without adequately considering the uncertainty surrounding the proposed demerger structure and without clarity regarding whether the demerger would occur before or after implementation of the resolution plan.
The Tribunal further directed reconsideration regarding CIRP costs, including clarification as to whether such costs were included within or payable over and above the plan amount. The Successful Resolution Applicant was also directed to provide proper financial disclosures, including a net worth certificate and details regarding the source of funds for the proposed unsecured loan.
The Resolution Professional was additionally directed to clarify the treatment of trade receivables and carry-forward losses reflected in the financial statements. Accordingly, the resolution plan was remitted to the Committee of Creditors for fresh consideration in light of the observations made by the Tribunal.
In this case the appellant was represented by Advocates Ravi Pahwa and Mayur Jugtawat