Date of Decision: 3 May 2023

Supreme Court of India

In the case of M.K. Rajagopalan v. Dr. Periasamy Palani Gounder, the Supreme Court provided clarification regarding the requirements for determining the eligibility of a Resolution Applicant. The Court held that the commercial decisions made by the Committee of Creditors (“CoC“) must not exceed the boundaries set by the law. Accordingly, the Court affirmed the order of the National Company Law Appellate Tribunal (“NCLAT“) which rejected the Resolution Plan proposed by the Successful Resolution Applicant (“SRA“).

Facts

The Tourism Corporation of India Limited filed an application under Section 7 of the Insolvency and Bankruptcy Code (“IBC“), seeking the commencement of a Corporate Insolvency Resolution Process (“CIRP“) against Appu Hotels Limited (“Corporate Debtor“), which was accepted in 2020. Subsequently, the CoC granted their approval to the proposed Resolution Plan, and an application seeking approval of the Resolution Plan was filed before the National Company Law Tribunal (“NCLT“). Throughout the proceedings, multiple objections were raised against the Resolution Plan; however, the NCLT dismissed all objections and granted its approval .

Subsequently, the decision was challenged before the National Company Law Appellate Tribunal which set aside the Resolution Plan on various grounds. NCLAT held that the SRA was ineligible due to their alleged disqualification under Section 164(2)(b) of the Companies Act, 2013, and Section 88 of the Indian Trusts Act, 1882. The SRA then appealed to the Supreme Court.

Analysis of issues

The challenge presented to the Supreme Court encompassed several issues that were thoroughly examined by the court. First, with regard to the Indian Trusts Act of 1882, the Supreme Court conducted a comprehensive analysis to determine the eligibility of M.K. Rajagopalan, who serves as the managing trustee of Sri Balaji Vidyapeeth, a charitable trust, to apply as a Resolution Applicant, despite the rejection of Sri Balaji Vidyapeeth’s Expression of Interest. The Supreme Court scrutinised the Resolution Plan submitted by MK Rajagopalan and noted his acknowledgment of being the founder of Sri Balaji Vidyapeeth, with the institution functioning under his guidance. Consequently, the Supreme Court concluded that MK Rajagopalan could not be allowed to assume the role of Sri Balaji Vidyapeeth or bypass the provisions outlined in Section 88 of the Indian Trusts Act of 1882. As a result, MK Rajagopalan was held ineligible.

Furthermore, the Supreme Court conducted an analysis of the eligibility of MK Rajagopalan in accordance with Section 29A of the IBC in conjunction with Section 166(4) of the Companies Act, 2013. The latter act prohibits a director of a company from engaging in any situation where there exists, or may exist, a direct or indirect interest that conflicts with the company’s interests. When this provision is considered alongside Section 29A(e) of the IBC, the Supreme Court determined that an individual with conflicting interests with the company during the CIRP is disqualified from being a resolution applicant. In the current case, MK Rajagopalan served as the Managing Director of MGM Healthcare Pvt. Ltd., a specialised hospital, and within the proposed Resolution Plan, he also intended to convert the Coimbatore property of the Corporate Debtor into a hospital. Consequently, MK Rajagopalan was held ineligible.

The Supreme Court stated that the commercial wisdom of the CoC necessitates a decision-making process that takes into account the commercial interests of all stakeholders involved and strives to maximise the value of the Corporate Debtor’s assets. The Supreme Court highlighted the importance of the CoC thoroughly examining all pertinent information and engaging in thoughtful deliberation before reaching a decision on the resolution plan, including its financial structure. It stressed that the CoC cannot endorse a resolution plan that was not presented to them prior to its submission to the NCLT. The Supreme Court ruled that the CoC must possess all relevant information to make an informed decision based on its commercial wisdom. In the current case, the Supreme Court concluded that the resolution plan had not been approved by the CoC based on its commercial wisdom. Therefore, the decision of the NCLAT to reject the resolution plan and refer the matter back to the CoC was upheld.

Lastly, the Supreme Court placed significant emphasis on the fact that disqualification under Section 164(2)(b) of the Companies Act, which applies to directors of companies that have failed to fulfill financial obligations, cannot be presumed until a definitive decision of disqualification is granted by the competent authority. The Supreme Court ruled that the registrar of companies should examine the issue of disqualification and that the eligibility of a resolution applicant to serve as a director and submit a resolution plan can only be presumed upon the receipt of a specific order of disqualification. The Supreme Court also clarified that there is no concept of ‘deemed disqualification’ under Section 164(2)(b).

The judgment

The Supreme Court held that the resolution plan in this matter should not have been approved by the NCLT primarily for two major reasons — one, for the ineligibility of the resolution applicant and second for not placing the revised resolution plan in the CoC before seeking approval from NCLT. The Supreme Court further upheld the NCLAT’s reasoning of two ‘Expression of Interests’ by the M.K. Rajgopalan of having a material bearing on the competence of the resolution plan of the M.K. Rajgopalan, because of directly being in contravention of Section 88 of the Trusts Act. However, the Supreme Court set aside NCLAT’s observations and directions with regards to the treatment of the related party in the resolution plan and regarding the settlement offer of the promoter.

Implications

The Supreme Court engaged in a comprehensive examination of Section 29A of the IBC in conjunction with other relevant statutes, shedding clarity on specific sub-sections that pertain to the disqualification process under Section 29A.

The Supreme Court’s decision provides invaluable guidance to Resolution Professionals, empowering them to make well-informed decisions in their crucial role of overseeing the insolvency resolution process. By offering clarity and interpretation, this ruling not only strengthens the legal framework but also encourages a more transparent and effective approach in dealing with disqualifications under Section 29A, ultimately contributing to the integrity and success of the resolution process.