CoC-Approved Valuation Cannot Be Reopened At Instance Of Suspended Director: NCLAT New Delhi

The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) on 14 July held that a suspended director cannot seek fresh valuation of a corporate debtor's assets after the Committee of Creditors (CoC) has approved the valuation reports and the resolution plan. Valuation decisions fall within the CoC's commercial wisdom.

Judicial Member Justice Mohd Faiz Alam Khan and Technical Member Naresh Salecha dismissed appeals filed by Santosh R. Shetty, suspended director and promoter of Sristi Hospitality Pvt. Ltd., challenging orders passed by the Mumbai Bench of the National Company Law Tribunal (NCLT). The NCLAT upheld the rejection of his revaluation plea and the approval of the resolution plan. The Bench observed:

“...valuation of the Corporate Debtor's assets, once conducted by IBBI-registered valuers in accordance with the CIRP Regulations, and accepted by the CoC, cannot be challenged by a suspended director or promoter at the stage of approval of the Resolution Plan. If the CoC disagrees with a valuation, it has the power to direct a fresh valuation. If the CoC accepts the valuation, that decision is final for the purposes of CIRP and cannot be interfered with by the Adjudicating Authority or even this Appellate Tribunal, or appellate authorities only on grounds of commercial inadequacy.”

Shetty had filed two appeals before the NCLAT against orders passed by the Mumbai NCLT Bench. The first order dated 7 May 2024 dismissed his application seeking revaluation of the corporate debtor's prime property. The second order dated 12 July 2024 approved the resolution plan.

Sristi Hospitality, incorporated in 2003 and registered as a Micro, Small and Medium Enterprise (MSME), owned a property called “Liberty Lodge”. Saraswat Co-operative Bank Ltd. was the sole financial creditor and had sanctioned loans in 2017 secured by a mortgage over the property and personal guarantees from the Shetty family. After defaults, the account was classified as a non-performing asset (NPA) in 2019 and CIRP commenced in February 2023.

Shetty argued that the property was grossly undervalued, relying on earlier valuations exceeding Rs. 76 crore compared to the resolution plan consideration of around Rs. 32 crore. He alleged collusion between the resolution professional and the successful resolution applicant, manipulation of creditor claims and violations during the CIRP. He also claimed that, as an MSME promoter and personal guarantor, he had priority rights to submit a competing resolution plan.

The respondents rejected these allegations and submitted that the resolution professional appointed five registered valuers to value the corporate debtor's assets, including land and building, plant and machinery and financial assets. They further argued that the CoC unanimously approved the resolution plan with 100% voting share after exercising its commercial wisdom. They also pointed out that the suspended directors, including Shetty, failed to cooperate during the CIRP despite repeated requests and raised objections only after the CoC approved the resolution plan.

The Tribunal held that Shetty had the right to challenge the orders as a suspended director and personal guarantor under Section 61(1) of the IBC (which allows an aggrieved person to appeal against an order of the Adjudicating Authority). It held that he filed the revaluation application belatedly, eight months after the CoC approved the resolution plan and after the NCLT reserved the matter for orders.

On the allegations of CIRP violations, the Bench found no evidence to support Shetty's claims and held that it could not set aside a resolution plan approved by the CoC with 100% voting share. It reiterated that valuations conducted by IBBI-registered valuers under the CIRP Regulations determine the fair and liquidation value of the corporate debtor. It observed:

“The IBC and CIRP Regulations [provide] a sound framework for the conduct of the valuation and provide adequate safeguards to appoint two registered valuers to determine the fair and liquidation value of Corporate Debtor.”

Further, the Tribunal noted that the resolution professional can appoint a third valuer if the two valuation estimates differ significantly. It also observed that the CoC can seek clarifications from valuers and direct a fresh valuation if it disagrees with the valuation. It rejected Shetty's claim that he was denied an opportunity to submit a resolution plan, noting that neither he nor his alleged investor submitted a resolution plan through the prescribed process. The Bench observed that “an investor commitment letter or informal indication of willingness does not constitute a resolution plan”.

Accordingly, the NCLAT dismissed the appeals and upheld the NCLT orders approving the resolution plan.

For Appellants: Advocates NPS Chawla, Aarsheya Sharoa, Abhinav Mishra, Shubham Raghuwanshi

For Respondents:

- Advocates Sumant Batra, Akshay Goel, Sarthak Bhandari, Ayushman Awasthi, Riya Kaur Arora, for R-1

- Advocates Janender Kr. Chumbak, Radhika, and Keshav Gaud for R-2.

- Senior Advocate Sudhir K. Makkar with Advocates Anjali Sharma, Ragini Vinaik, Hridyaa Singh, Aadhya Shrotiya for R-3.