CASE ANALYSIS: M.K. RAJAGOPALAN V DR. PERIASAMY PALANI GOUNDER & ANR

INTRODUCTION:

In the recent case of M.K. Rajagopalan v Dr. Periasamy Palani Gounder & Anr., the Supreme Court addressed critical issues related to the eligibility of resolution applicants in insolvency cases and the proper application of legal provisions under the Companies Act, 2013, and the Insolvency and Bankruptcy Code, 2016 (IBC). The case underscores the necessity of a competent authority's declaration for the disqualification of a resolution applicant and highlights the court's emphasis on upholding the integrity of the insolvency resolution process.

LEGAL FRAMEWORK:

The central legal provision under scrutiny in this case is Section 164(2)(b) of the Companies Act, 2013. Section 164 (2)(b) states that no person who is or has been a director of a company which has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,

shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.]

Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.

BRIEF FACTS:

Appu Hotels Limited (AHL), a company facing insolvency due to default in loan repayments, initiated the Corporate Insolvency Resolution Process (CIRP) under the IBC. The National Company Law Tribunal (NCLT) approved a resolution plan after several rounds of meetings with the Committee of Creditors (CoC). However, this decision was challenged before the National Company Law Appellate Tribunal (NCLAT), which reversed the NCLT's order.

BRIEF BACKGROUND:

The case originated from an application under Section 7 of the IBC, leading to CoC meetings and the subsequent approval of a resolution plan. Challenges arose when the NCLAT reversed the NCLT's decision, necessitating an appeal to the Supreme Court. The issues at hand included the eligibility of the resolution applicant, objections to the valuation of assets, and procedural matters.

CONTENTIONS OF THE APPELLANTS:

The appellants contested the promoter's right to withdraw under Section 12-A of the IBC, arguing that their eligibility as a resolution applicant could not be disqualified under Section 29-A of the IBC based on the Trust Act, 1882. They emphasized that the resolution plan should not be set aside solely on the grounds that the valuation was lower than the liquidation value. The appellants limited the challenge to matters 'other than' the CoC's autonomy or commercial wisdom.

The appellants also raised procedural objections, arguing that the CoC rejected the promoter's application, leaving them with no choice but to initiate a fresh CIRP. They contended that the settlement proposal submitted by the corporate debtor did not align with the CIRP regulations and Section 12-A of the IBC.

CONTENTIONS OF THE RESPONDENTS:

The respondents claimed that the CoC had not adequately considered the promoter's settlement proposals to withdraw from the CIRP under Section 12-A of the IBC. They argued that the resolution plan undervalued the corporate debtor's assets and violated Sections 88 of the Trusts Act and Section 164(2)(b) of the Companies Act, 2013. Additionally, they contended that the resolution plan was not presented to the CoC after its revision, and there was no provision for post facto ratification of a resolution plan.

CONTENTIONS OF THE THIRD PARTY:

The third party, representing the bank, emphasized that the resolution plan had already been approved by the bank, holding a significant voting share in the CoC. They argued for the urgency of resolving the CIRP within a specific timeframe to prevent deterioration of asset value. The third party requested the CoC to continue with the CIRP independently, without the influence of the NCLAT's observations.

OBSERVATIONS OF THE COURT:

The Supreme Court, in its observations, delved into the intricacies of the case. It opined that the managing trustee of a charitable trust, also the resolution applicant, was disqualified due to an inability to run a profit-making entity. The court noted the close association of the Resolution Applicant with the trust and highlighted that any financial gains from the resolution plan would be subject to Section 88 of the Trusts Act, rendering the plan invalid.

The Court also underscored the significance of the commercial wisdom of the CoC in approving a resolution plan. It noted that the revised plan had not been presented to the CoC before submission to the Adjudicating Authority, a fact that the NCLAT did not approve. The Court acknowledged the importance of proper procedures, including the treatment of related parties in the resolution plan and the settlement offer of the promoter.

COURT'S DECISION:

The Supreme Court confirmed the NCLAT's decision regarding the non-approval of the resolution plan, citing consistency with the court's reasoning. However, the court dismissed other findings, observations, and directions of the Appellate Tribunal. The decision left the determination of the fresh settlement proposal, approved by the CoC after receiving fresh resolution plans, to the Adjudicating Authority. The Adjudicating Authority was tasked with considering this aspect while taking into account relevant laws, the facts of the case, and the Supreme Court's observations.

CONCLUSION:

In conclusion, the case of M.K. Rajagopalan v Dr. Periasamy Palani Gounder & Anr. provides valuable insights into the complex interplay between the Companies Act, 2013, and the Insolvency and Bankruptcy Code, 2016. The decision underscores the importance of a competent authority's declaration for disqualification, the role of the CoC's commercial wisdom, and adherence to proper procedures in the insolvency resolution process. The case serves as a precedent for ensuring the integrity and fairness of the resolution process while balancing the interests of various stakeholders.

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Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

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