A Case Study – Withholding of Insolvency Resolution Plan from erstwhile directors goes against the intent and spirit of IBC – By Adv. Pratik Sarkar

During Pre-Covid 19 lockdown, takeover of Ruchi Soya by Patanjali Ayurved made headlines, since the hair-cut of around 65% out of the total exposure was taken by the banks; and virtually without real cash outflow by Patanjali, the resolution plan was approved – How much has changed since then!!!


A Case Study – Withholding of Insolvency Resolution Plan from erstwhile directors goes against the intent and spirit of IBC

Ref: Vijay Kumar Jain V/s Standard Chartered Bank (Supreme Court)
Case Citation: [2019] ibclaw.in 24 SC

Prologue: During Pre-Covid 19 lockdown, takeover of Ruchi Soya by Patanjali Ayurved made headlines, since the hair-cut of around 65% out of the total exposure was taken by the banks; and virtually without real cash outflow by Patanjali, the resolution plan was approved – How much has changed since then!!!

But for an unkind twist of fate, the Shahra family – erstwhile owners of ‘Ruchi Soya’ would have proved the legendary Charlie Chaplin right, ‘nothing is permanent in this wicked world, nor even our troubles’. For the first time since it was founded in 1986, Ruchi Soya crashed into RED in March 2016, with a loss of INR 878.7 Crore. From a modest beginning in Indore in the 1980’s, Ruchi Soya went on to become a household name for soya chunks with the brand NUTRELA. Over the decades, it also emerged as India’s largest maker of edible oil. Cut to 2016, castor seed turned out to be its biggest bane. While soybean and palm oils formed major components of Ruchi Soya’s edible oil business, castor was a smaller pie but brought Ruchi Soya’s downfall for its penchant in trading castor seeds on the commodities exchange. A crash in global prices of the castor seed coupled with falling revenues in the oil business dealt a crippling blow to Ruchi Soya. Debts ballooned to INR 10,000 Crore. In July 2016, IDFC Bank filed a winding-up petition against Ruchi Soya, after it failed to repay its loan. And in February, 2017 the company was served with a notice by an unsecured lender under Insolvency & Bankruptcy Code, seeking repayment of INR 9.63 Crore. Post 2012, Ruchi Soya had started tilling the downhill with fluctuating rains which drastically brought down the area under soya cultivation. Import of refined oil from Malaysia and Indonesia increased substantially along-with unfavourable local government policies, added to the woes. Resultantly, the core refining business went down by almost half from INR 9,629.12 Crore in the quarter ending on March 2015 to INR 4,939.63 Crore in the December 2016Quarter. More trouble was in store, SEBI barred Ruchi Soya Industries from the securities market for alleged fraudulent and manipulative trading in castor seeds on the NCDEX. A large part of their net worth got eroded, Ruchi Soya lost hundreds of Crores in open positions. While castor trading took its toll, a simultaneous decline in its core business too weighed heavily on finances…Source inputs: economictimes.com, 16th April, 2017.

Ruchi Soya gasping in debt, numerous companies got queued up to acquire it. Yoga guru – Baba Ramdev’s Patanjali Ayurved, Adani Wilmar, Godrej Agrovet, and Emami Agrotech had all bid for Ruchi Soya. A strong portfolio of mass-market edible-oil brands, soya food products, and a ready-made infrastructure of manufacturing were the main attractions.  To reverse its declining fortune Ruchi Soya entered into a refining and packaging partnership with Patanjali in February 2017, but even that brought little respite as creditors moved the RBI to recover their dues. Finally, in December 2017, Ruchi Soya entered into the Corporate Insolvency Resolution Process after the RBI placed it on a list of 40 companies to face bankruptcy proceedings. The fate of its investors tantalised on which suitor pulls Ruchi Soya out of the abyss and it was Yoga guru Baba Ramdev led Patanjali who walked away with a bid of INR 4,325 Crore. Patanjali almost got a walk over after Adani Wilmar decided to pull out from the race despite being selected the highest bidder few months back. Source inputs: itcportal.com dated: 16th April, 2014; qz.com dated 20th June, 2018, economictimes.indiatimes.com dated 16th April, 2017; business-standard.com dated 30th April, 2019 & 8th September, 2019.

Background of the IBC litigation

The appellant – Sh. Vijay Kumar Jain was the Executive Director of Ruchi Soya, the appeal by him before the Supreme Court arose out of Hon’ble NCLAT’s rejection to him, to be provided with relevant documents including copies of the insolvency resolution plans to meaningfully participate in the CoC meetings. Briefly navigating the facts – Against Ruchi Soya, financial creditors – Standard Chartered & DBS Bank moved application U/s 7 of IBC. An Interim Resolution Professional thereafter took charge and constituted the CoC. Sh. Vijay Kumar Jain, as a member of suspended board of directors was given a notice and was permitted to attend the first CoC meeting held on 12th Jan, 2018. Thereafter on 7th Jun’ 2018, Sh. Jain moved the NCLT that he be allowed an effective participation of the CoC meeting and for that he be shared the resolution plan and other connected commercial information. On 1st Aug’ 2018, NCLT rejected the application of Sh. Vijay Kumar Jain for being shared of the resolution plan, etc…, but no fetters were imposed to his attendance in the COC meeting. Against the order of Hon’ble NCLT, appeal was preferred to NCLAT, which was dismissed on 9th Aug’ 2018, resultantly Supreme Court was approached.

On 12th Aug’ 2018, Sh. Vijay Kumar Jain executed a non-disclosure-agreement for the resolution plan being shared to him. On 23rd Aug, 2018 the resolution plan of Adani Wilmar was approved with 96.86% of CoC votes and the very next day, the resolution professional submitted the resolution plan to Hon’ble NCLT. On 27th Aug’ 2018, the Supreme Court by its interim order stated that the bids will not be finalised by NCLT without its permission.

The Tussle – The case of Vijay Kumar Jain being, under Section 24 (3) of IBC, the resolution professional has to issue notice of meeting to the CoC members including suspended board of directors And Regulation 21 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 stipulates that along-with the notice of meeting, there shall contain the agenda of the meeting and documents relevant for the matters to be discussed and voted; inferably the resolution plans are an accompaniment to the notice of the meeting. The Resolution Plan approved U/s 31 (1) of IBC shall be binding on all guarantors and stakeholders; furthermore U/s 60 (5) of IBC, such persons shall have a right to challenge the terms of proposed resolution plan.

The respondents/Standard Chartered Bank rested their case U/s 30 (3) OF IBC and Regulation 39 (2) of  IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which mandates that submission of resolution plan has to only meet the test of Section 30 (2) of the Code for the CoC members to accord their approval. A distinction is discernible between the term ‘committee’ and ‘participant’; and participants are expressly excluded in Regulation 39 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Reference was drawn to notes on clauses to Section 24 of the IBC to buttress the contention that erstwhile directors are only information givers, reliance was placed on Mobilox Innovations V/s Kirusa Software in support that notes on clauses are important aid in understanding object of the Section and hence are to be read in interpreting statues. Reference was drawn to regulation 7 (2) (h) of IBBI (Insolvency Professionals) Regulations, 2016 read with first schedule thereto, where clause 21 of the ‘Code of Conduct for Insolvency Professionals’ mandates maintaining confidentiality of information relating to insolvency or liquidation process, except with the consent of the relevant parties or if required by law. Further suspended directors anyhow do not have a right to file application U/s 60 (5) or appeal U/s 61 of IBC. Another argument put forward being, ‘information memorandum’ U/s Sec 5 (10) of IBC And ‘resolution plan’ Sec 5 (26) of IBC are separately defined and are not documents within regulation 21 (3) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016; moreover a director who is a financial creditor is even excluded of participation, representation or voting in CoC meeting, vide Section 21 (2) of the IBC; so an incongruous position emerges that ‘director simplicitor’ is entitled to receive notices/documents etc…, and ONLY ex-director who is a FINANCIAL CREDITOR should be hidden off any documents pertaining to resolution plans.

From the standpoint of Sh Vijay Kumar Jain/Appellant, from decoding Section 21 of the IBC, it emerges that CoC constituted under Section 21 to comprise of all financial creditors, except for related parties of the corporate debtor. Likewise, operational creditors in aggregate having minimum of ten percent of debt can also have one representative representing all of them, without voting right; Sec 24 (3) of the code, mandates giving of notice of CoC meeting to the ex-directors; Sec 25 (2) (f) & (i) mandates submission of all resolution plans at the CoC meetings; Resolution Applicant on being approved of his resolution plan has to satisfy the test U/s 30 (2) of the Code and the NCLT if satisfied of the resolution plan accords approval of the plan U/s 31.

It cannot be thus gainsaid to state that ex-directors and operational creditors are very much participant of the resolution plans, thus cannot be precluded of their say, though having no right to vote. Inferably, they are entitled to have an advance copy of the proposed resolution plan, so are enabled to effectively comment in safeguarding their interest. Countering the same, it was the argument of the respondents that notes on clauses to Section 24 of the IBC, which was relied upon to deny advance copy of resolution plan to ex-directors reads as – Clause 24 prescribes the modalities for the meeting of the committee of creditors. The meetings are conducted by the resolution professional and may be attended by the ex-directors/partners of the corporate debtor. This gives an opportunity for the committee of CoC and the resolution professional to seek information that they may require to assess the financial position of the corporate debtor and prepare a resolution plan. The resolution professional seeks information in preparing the ‘information memorandum’ U/s 29 of IBC, which is shared with the resolution applicants to submit their resolution plan U/s 30 of IBC. Even assuming notes to clause 24 is a one-way street, but Section 31 (1) makes it clear that quite often, erstwhile directors are also guarantors to the financial creditors and are vitally interested in a resolution plan binding them, thus cannot be kept out of the resolution plan. The underscoring engagement of the erstwhile directors vis-à-vis the corporate debtor is also by way of Regulation 39 (5) of Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 so as to sharing of the NCLT order copy with the participants which includes non-CoC members too, either accepting or rejecting the resolution plan. Section 60 (5) (c) of the IBC is wide enough to include that erstwhile directors too have an independent right of approaching NCLT and being heard before being satisfied to pass order under Section 31 of the Code; by corollary, in case aggrieved of the order of NCLT, the erstwhile director can also prefer appeal to NCLAT U/s 61 of IBC.

There being no dispute that every participant, whether or not a CoC member, is entitled to receive notice of the CoC meeting, together with copies of documents pertaining to the issues to be discussed and voted therein; under Regulation 21 (3) (iii) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the term documents certainly is wide enough to include resolution plans. Regulation 24 (2) (e) enjoins upon the Resolution Professional that he takes a roll call of all the participants and gets ensured, the participants have received all the relevant material pertaining to the CoC meeting. Regulation 35 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 mandates sharing of fair value/liquidation value of the assets to members of CoC, only after receipt of resolution plans and after receipt of undertaking of confidentiality of the fair value and liquidation value. Reference to Regulation 38 (1) of the said Regulations, a resolution plan has to include a statement how the interest of all the stakeholders been dealt with; and as per Regulation 38 (3) (a), the resolution plan has also to demonstrate that it addresses the cause of default; and the erstwhile directors definitely have the locus in addressing the same. In sum, unless the copy of resolution plan is made available as a part of documents to the notice of meeting, the erstwhile directors will be clueless of their participation in the CoC meeting. Thus the resolution plan can be shared with all participants including the erstwhile directors who are not CoC members subject to appropriate non-disclosure agreement/ confidentiality undertaking by them.

To conclude; drawing upon Bankruptcy Law Committee Report – 2015, its avowed objects emphasised to enable symmetry of information between debtors and creditors. Information required to draw bankruptcy resolution process must be made available as and when required to all creditors and third parties seeking to participate in resolution process through the regulated professional. Thus withholding of Insolvency Resolution Plan with erstwhile directors goes against the intent and spirit of IBC.

‘How safe are corporate debt portfolio’

NCLT in the first week of September, 2019 approved the Baba Ramdev-led Patanjali group’s INR 4,350-cr resolution plan. Creditors of Ruchi Soya will receive a maximum of INR 4,240 Crore in repayments which entails a 65 per cent haircut to the verified claims of about INR 12,100 Crore, remaining INR 110 Crore will be used to finance the expansion of Ruchi Soya after the merger. INR 4,053.19 Crore to be paid to secured financial creditors, INR 40 Crore to unsecured financial creditors, INR 90 Crore to operational creditors, INR 25 Crore to clear statutory dues, INR 14.92 Crore to workmen/employees and INR 11.89 Crore to provide counter bank guarantee. Ruchi Soya informed that the resolution applicant – Patanjali group will infuse INR 204.75 Crore as equity and INR 3,233.36 Crore as debt. The acquirer will infuse another INR 900 Crore through subscription of non-convertible debentures and preference shares in the Special Purpose Vehicle (SPV). Patanjali also would infuse over INR 3,438 Crore as equity and debt to settle dues of creditors of the debt-laden Company. Adhigrahan Pvt, a unit of Patanjali Ayurved Ltd, and three other companies will merge with Ruchi Soya. Shareholders of Patanjali Consortium will get one share of Ruchi Soya for each share they hold in the former. With the acquisition of Ruchi Soya, Patanjali is expected to become a major player in soyabean oils and other products. Source inputs: domain-b.com 9th September, 2019.


Adv. Pratik Sarkar is a practising Advocate in Mumbai & is a Partner of Vidhi Legal. He can be contacted at mail id.: pratik@vidhilegal.in


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