SRA Need Not List All Assets In Resolution Plan; Undisclosed FDRs Belong To Corporate Debtor SPS Steels: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi recently held, in the insolvency of SPS Steels Rolling Mills Ltd, that the successful resolution applicant is not required to specify every asset of the corporate debtor in the resolution plan, and assets not mentioned in the information memorandum do not cease to belong to the corporate debtor after approval of the plan.

A bench of Judicial Member Justice Mohammad Faiz Alam Khan and Technical Member Naresh Salecha, after examining the insolvency regulations governing the contents of the information memorandum and the resolution plan, observed, “We find that in above quoted regulations regarding Resolution Plan, no such stipulation has been made that SRA is bound to give such specific details of the assets being taken over. The Appellant gave its Resolution Plan based on the information memorandum prepared by the Resolution Professional. It is also observed that in information memorandum there was no clause that any assets not mentioned in the information memorandum will not be passed on the Appellant being the SRA, or in other words such assets will be given to Erstwhile CoC.”

The CIRP against SPS Steels Rolling Mills Ltd was initiated in 2017 on a petition filed by Allahabad Bank. Shakambhari Ispat and Power Ltd emerged as the successful resolution applicant, and its plan was approved in April 2019 after payments were made to creditors, including about Rs 32.50 crore to Central Bank of India.

After taking over the company, the new management discovered fixed deposit receipts kept with banks as margin money for bank guarantees, which had not been included in the information memorandum prepared during the resolution process.

The deposits had been created in the name of the corporate debtor as margin money for bank guarantees issued in favour of statutory authorities. According to the appellant, the guarantees had expired and the deposits should have reverted to the company. Instead, the banks either adjusted the amounts against dues or refused to release them.

The NCLT dismissed the applications filed by the company and directed that the amounts be placed before the erstwhile committee of creditors for redistribution, which led to the appeal before the appellate tribunal.

The appellant argued that once the resolution plan was approved and implemented, the liabilities of the corporate debtor stood settled, but its assets continued to remain with the company under the new management. It said the fixed deposits were in the name of the corporate debtor and could not be appropriated by the banks after the resolution plan had been fully implemented. It also relied on earlier rulings holding that margin money kept for bank guarantees must return to the borrower if the guarantees expire without invocation.

The banks opposed the plea, saying the resolution plan had been prepared on the basis of the information memorandum and the deposits were never disclosed during the insolvency process. According to them, allowing the resolution applicant to claim such amounts later would give it an unfair benefit after creditors had already taken substantial haircuts.

They also argued that the deposits were in the nature of contingent assets and were not reflected in the financial statements considered during the resolution process.

The tribunal said the purpose of the information memorandum is to give a comprehensive picture of the corporate debtor, but omission of an asset from it does not take away ownership.

It observed, “It needs to be appreciated that the Corporate Debtor may hold large number of physical as well as financial assets. Sometimes, due to many reasons some of such physical assets or even financial assets, might have been skipped from the Resolution Professional and therefore, same might not have been mentioned in the information memorandum.”

Referring to earlier decisions on margin money kept for bank guarantees, the tribunal held that such deposits remain the property of the borrower if the guarantees expire without invocation and cannot be appropriated by the banks after the resolution plan has been implemented.

The bench observed, “Logically, such FDRs could not have become property of the Respondent banks and rather can be viewed as assets of the Corporate Debtor. We hold that the Respondent Banks have no right to adjust such balance after the Resolution Plan has been fully implemented.”

Allowing the appeals, the tribunal set aside the NCLT order and remanded the issue relating to the fixed deposit proceeds to the NCLT for fresh decision in accordance with law.