Practising CA Not Ineligible To Submit Resolution Plan Merely By Profession: NCLAT Delhi

A Bench of Judicial Member Justice Mohd Faiz Alam Khan and Technical Member Arun Baroka also held that procedural irregularities in a Corporate Insolvency Resolution Process (CIRP) must be shown to have materially affected the approval of a resolution plan to sustain a challenge under Section 61 of the Insolvency and Bankruptcy Code (IBC). It observed:

“We note that Section 29A of the Code specifies the persons who are ineligible to submit a Resolution Plan. A practising Chartered Accountant is not, merely by virtue of being a practising Chartered Accountant, included in the disqualifications enumerated in Section 29A.”

The appeals were filed by suspended directors Vinay Gupta and Niharika Goel against the Delhi Bench of the National Company Law Tribunal's (NCLT) order dated 23 April 2024 approving the resolution plan submitted by Suraj Garg.

The CIRP of Satellite Cables commenced on 3 January 2023 on an application filed by Oswal Minerals Limited. Resolution Professional (RP) Abhimanyu Mittal invited expressions of interest and, after evaluation, the Committee of Creditors (CoC) approved Garg's resolution plan with 100% voting share at its 11th meeting.

Gupta and Goel filed separate appeals before the NCLAT, raising objections to the conduct of the CIRP and approval of the resolution plan.

Gupta contended that the RP had not provided him with a copy of the resolution plan, preventing him from raising objections. He argued that this violated the principles of natural justice.

Goel challenged Garg's eligibility on the ground that he was a practising Chartered Accountant. She relied on Clause 11 of Part I of the First Schedule to the Chartered Accountants Act, 1949, which restricts a practising Chartered Accountant from engaging in any business or occupation other than the profession of Chartered Accountancy.

She also contended that an One-Time Settlement (OTS) proposal accepted by Bank of Baroda was not placed before the CoC by the RP. Further, she argued that statutory dues of Rs. 17.47 crore confirmed by the CGST Alwar Commissionerate were excluded from the resolution plan, contrary to the Supreme Court's ruling in State Tax Officer v. Rainbow Papers Ltd.

Goel further submitted that a higher bid of Rs. 6 crore submitted by Anuj Goyal was ignored, while Garg's bid of Rs. 5.85 crore was approved, and alleged that the RP had failed to conduct the CIRP transparently.

The RP submitted that the suspended directors had been uncooperative and that he had conducted the requisite due diligence before placing the resolution plan before the CoC for consideration and negotiation. He argued that the CoC's commercial wisdom was paramount and that there was no statutory bar against a practising Chartered Accountant acting as a resolution applicant.

The Institute of Chartered Accountants of India (ICAI) also clarified that practising Chartered Accountants are permitted to act as resolution applicants under the IBC, provided they do not act as whole-time directors.

On Gupta's objection regarding non-supply of the resolution plan, the Bench noted that Section 24(3)(b) of the IBC treats suspended directors as members of the CoC. However, it found that Gupta had failed to identify the prejudice caused to him or the specific objections to the resolution plan that he was prevented from raising. It held:

“A challenge under Section 61 cannot succeed merely by establishing a procedural objection. The Appellant must show that the alleged irregularity has materially affected the approval of the Resolution Plan or has resulted in violation of a substantive requirement of the Code.”

On Garg's eligibility, the Tribunal held that Section 29A does not disqualify practising Chartered Accountants and noted that the ICAI had confirmed that there was no such bar. It rejected the argument that the resolution plan's provision for Garg to lead the management of the corporate debtor meant that he had assumed an office prohibited under the Chartered Accountants Act. It noted:

“The mere fact that the Resolution Plan contemplated management of the Corporate Debtor under the leadership of the Successful Resolution Applicant cannot, by itself, establish that the Successful Resolution Applicant had assumed an office which is prohibited under the Chartered Accountants Act.”

On the OTS proposal, the Bench found no material showing that the CIRP had been withdrawn under Section 12A of the IBC, which provides for withdrawal of an insolvency application after admission with the requisite approval. It stated:

“We find no material before us showing that the CIRP was withdrawn under Section 12A. A settlement proposal between the parties, therefore, cannot by itself nullify the CIRP or prevent the CoC from considering Resolution Plans. The Resolution Professional was correct in pointing out that the mere existence of an OTS proposal did not authorise him to discontinue the CIRP in the absence of an order under Section 12A.”

It also rejected the challenge based on the higher bid, holding that the CoC is not bound to accept the highest numerical bid and may consider factors including the feasibility, viability and implementation capability of a resolution plan. It further noted that permitting revisions after closure of the process could destabilise the CIRP and that the higher bidder himself had not challenged the approval of Garg's plan.

On the statutory dues, the Bench considered the amendment to Section 3(31) of the IBC, which excludes a security interest created merely by operation of law from the definition of security interest. It held that the amendment was clarificatory and therefore had retrospective effect, concluding that Government dues could not claim priority over secured creditors merely on the basis of a security interest created by operation of law. It observed:

“This overrules the Rainbow Papers position and ensures statutory dues cannot claim secured creditor status. Being an explanation this has retrospective effect as a clarificatory amendment. Thus, the Amendment Explanation expressly excludes security interests created merely by operation of law. Thus, the Government dues cannot claim priority over secured creditors.”

Accordingly, the NCLAT dismissed the appeals, affirmed the NCLT's order approving Garg's resolution plan and held that completed resolution processes cannot be reopened merely because suspended directors disagree with the CoC's commercial decision. It imposed costs of Rs. 1 lakh each on Gupta and Goel for abusing the process of law and causing hindrance to the CIRP.

For Appellants: Advocates Pankaj Garg, Yaksh Garg, Yashna Ahuja and Muskaan Chawla

For Respondents: Advocates APS Madaan, K.D. Sharma, Vibhu Aggarwal, Aalok Jagga, Nipun Gautam and Sahil Lohan for SRA