NCLAT Delhi: Successful Resolution Applicant Cannot Escape Obligations Under Approved Plan by Citing Due Diligence Lapses
Background and Overview
The Principal Bench of the National Company Law Appellate Tribunal (NCLAT), New Delhi, delivered a comprehensive common judgment in a cluster of appeals arising from the Corporate Insolvency Resolution Process (CIRP) of Mandhana Industries Limited (subsequently renamed GB Global Limited). The appeals collectively addressed several interconnected legal issues: the consequences flowing from the failure of the successful resolution applicant (Formation Textile LLC) to implement its approved resolution plan, the invocation and forfeiture of the performance bank guarantee (PBG) and earnest money deposit (EMD), entitlement to refund of amounts already infused, the claims of interim trade creditors, and the compensation claim pressed by Bank of Baroda acting as the lead financial creditor and representative of the Committee of Creditors (CoC).
The impugned orders challenged in these appeals were two separate orders both dated 06.07.2023 passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench-I) — one arising from IA No.443 of 2021 filed by Formation Textile LLC and the other from IA No.1847 of 2021 filed by the Bank of Baroda/CoC.
Chronology of Key Events
Understanding the factual matrix is essential to appreciate the legal issues adjudicated by NCLAT.
The CIRP of Mandhana Industries Limited commenced on 29.09.2017 upon an application filed by Bank of Baroda under
Section 7of the Insolvency and Bankruptcy Code, 2016 (IBC). Ms. Charu Desai was appointed as the Insolvency Resolution Professional (IRP) and subsequently confirmed as the Resolution Professional (RP).The RP issued a Process Memorandum in March 2018 inviting resolution plans. Formation Textile LLC submitted its Expression of Interest on 23.05.2018 and was granted access to the data room on 30.05.2018 for due diligence purposes.
After an initial bidding process in which Finquest was declared H-1 and Formation as H-2, Formation filed an application before the Adjudicating Authority seeking an open bidding process. The Adjudicating Authority directed an inter-se open bidding exercise on 03.07.2018, following which Formation was declared as the H-1 bidder.
The CoC approved Formation's resolution plan with 80.92% vote share on 06th–07th July 2018, and the Letter of Intent (LoI) was issued and unconditionally accepted by Formation. Formation furnished a performance bank guarantee (PBG) of Rs.50,00,00,000 on 11.07.2018.
The Adjudicating Authority approved Formation's resolution plan on 30.11.2018. Formation subsequently took over management and control of the Corporate Debtor on 31.01.2019 following a handover process.
Despite taking control, Formation failed to make the upfront payment of Rs.226 crores required within 30 days of the effective date. Formation filed an application (MA No.2223 of 2019) seeking modification of the approved plan and eventually sought its recall.
As of 04.04.2019, Bank of Baroda recorded receipt of Rs.93.82 crores from Formation, comprising Rs.5 crores as EMD, Rs.50 crores as PBG, and Rs.38.82 crores as part-payment towards Formation's equity component.
On 05.12.2019, the Adjudicating Authority, as an interim measure, directed Formation to hand over possession of the Corporate Debtor to the CoC and ordered recommencement of the CIRP. Formation handed over possession on 08.01.2020.
On 10.12.2019, the CoC resolved, with 96.89% vote share, to invoke/forfeit the PBG and EMD in view of Formation's failure to implement the approved plan.
The resolution plan submitted by Dev Land & Housing Private Limited (DLH) was approved by the CoC with 67.01% vote share on 31.12.2020, and the Adjudicating Authority approved the DLH plan on 19.05.2021. The DLH plan offered only Rs.151 crores as against Formation's approved plan of Rs.460 crores.
At the time of DLH plan approval, the Adjudicating Authority directed that a fixed deposit of Rs.42.99 crores — representing amounts infused by Formation in the Corporate Debtor — be retained intact pending further orders.
During the period Formation was in management and control of the Corporate Debtor (from 31.01.2019 to 08.01.2020), various operational creditors supplied goods and services, resulting in outstanding dues. These operational creditors filed their respective applications before the Adjudicating Authority post-approval of the DLH plan, collectively characterised as "Interim Trade Creditors."
Issues Framed by NCLAT
NCLAT identified and addressed the following core questions:
- Whether the CoC's invocation of the PBG on 10.12.2018 was covered by the applicable clauses of the Process Memorandum.
- Whether the Adjudicating Authority's finding that the CoC and RP had not treated the approved plan as contravened by Formation was consistent with the record.
- Whether sufficient material was placed before the Adjudicating Authority by the CoC and RP to establish Formation's failure to implement the approved plan.
- Whether Formation's claim that the RP failed to disclose the forensic/transaction audit report constituted a valid ground to avoid obligations under the approved resolution plan.
- Whether the PBG and EMD could be adjusted against equity infusion or other consideration payable under the approved resolution plan.
- Whether the entire amount of Rs.93.82 crores was refundable to Formation.
- Whether the Adjudicating Authority was justified in rejecting the applications of the Interim Trade Creditors without adjudicating them on merits.
- Whether Formation's claim for interest at 12% under
Section 42(6)of the Companies Act, 2013 was maintainable. - Whether Bank of Baroda's application (IA No.1847 of 2021) for compensation/damages could be adjudicated under
Section 60(5)(c)of the IBC.