NCLAT clarifies eligibility of Resolution Applicant: 'the term entity in MIB guidelines can include individuals’, read judgment

Recently, the NCLAT examined the procedural aspects of the Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) and upheld the decisions made during the Challenge Process conducted by the Resolution Professional (hereinafter referred to as “RP”). The Tribunal emphasized that:

"Challenge Process dated 27.10.2023 was conducted in accordance with the CIRP Regulations as well as the Process Note dated 12.10.2023."

This observation came after the Appellants challenged the bidding process, alleging violations of CIRP regulations and claiming that the selected bidder's offer was invalid. The Tribunal further upheld the authority of the Committee of Creditors (hereinafter referred to as “CoC”) to conduct negotiations for value maximization post-Challenge Process, and affirmed that the Resolution Professional had properly verified the eligibility of the Successful Resolution Applicant (hereinafter referred to as “SRA”).

Reliance Broadcast Network Ltd. was admitted to the CIRP on 24.02.2023, following an application by IDBI Trusteeship Services Ltd. On 14.04.2023, the RP invited Expressions of Interest (EoIs), with Abhijit Realtors & Infraventure Pvt. Ltd. and Creative Channel Advertising & Marketing Pvt. Ltd. among the applicants. Six Resolution Plans were received, and the CoC initiated a Challenge Process, setting a base price of Rs.240 crores.

After three rounds of bidding on 27.10.2023, Sapphire Media Ltd. submitted the highest bid of Rs.251 crores. Further negotiations led to revised proposals, with Sapphire Media Ltd. offering Rs.261 crores. On 16.11.2023, the CoC approved Sapphire Media Ltd.’s Resolution Plan with 88.97% of votes, and the RP filed IA No.5391 of 2023 for approval.

The Consortium filed IA No.5572 of 2023 and IA No.614 of 2024 to challenge the CoC’s decision, while Creative Channel Advertising & Marketing Pvt. Ltd. filed IA No.290 of 2024, seeking to disqualify Sapphire Media Ltd. and restart the process. On 06.05.2024, the Adjudicating Authority dismissed the IAs and approved the plan of Sapphire Media Ltd. The Consortium and Creative Channel Advertising & Marketing Pvt. Ltd. subsequently filed appeals challenging the approval and rejection of their applications.

The Appellants in Company Appeal (AT) (Ins.) Nos. 980 and 981 of 2024 argued that the Challenge Process conducted by the Resolution Professional violated CIRP Regulations 2016 and the Process Note dated 12.10.2023. They claimed that the Consortium was wrongfully exited after the second round, despite submitting a higher bid than the highest bid in the first round, and that the SRA should have been disqualified for not submitting an incremental bid. They asserted that combining modification and challenge mechanisms under Regulation 39(1A) was impermissible.

The Appellants highlighted procedural irregularities, such as failure to disclose the highest bid details and allowing non-participants in the challenge process to negotiate. They also contended that the SRA, incorporated only on 21.10.2022, did not meet the eligibility criteria in the EOI, and that including its promoter’s net worth was incorrect. The SRA’s ineligibility under Ministry of Information and Broadcasting (MIB) guidelines and its blacklisting by Indian Oil Corporation further invalidated its plan. The Appellants argued that the CoC’s approval of the SRA’s plan is legally flawed, and new documents regarding the SRA’s eligibility have emerged, strengthening their case.

The Resolution Professional argued that the Appellants did not raise any objections for six months, only doing so after the CoC approved the Resolution Plan. The challenge process followed the rules, with the SRA’s bid of Rs.241 Crores being the highest in Round 1, while the Consortium’s bid of Rs.240 Crores did not meet the required increment in Round 2, leading to their exit. The SRA then made a valid bid of Rs.251 Crores in Round 3.

The CoC approved the SRA’s plan after assessing all bids. The Resolution Professional stated that objections to the process and eligibility were not raised in time, as per the CIRP Regulations. The interpretation of ‘entity’ in the EOI, including individuals, was correct and should be upheld. The SRA met the eligibility criteria, and the Consortium cannot now challenge the process. Additionally, the Appellants' documents, like Goods and Services Tax (GST) Returns and Income Tax Returns, were not required and should not be considered. The SRA’s plan was approved by the CoC based on its commercial wisdom, and the Appellants’ objections were unfounded.

The Court examined several issues regarding the Challenge Process conducted by the Resolution Professional (RP) on 27.10.2023. It considered whether the process complied with the CIRP Regulations and the Process Note issued on 12.10.2023. The Court noted that the Consortium's objection to the SRA's bid not being in increments of Rs. 10 Crores was not in accordance with the Process Note, stating, "When Consortium itself has given a bid of Rs.240 Crores i.e. equal to base bid, the objection that bid of SRA which is not increments of Rs.10 Crores should not be accepted, is not in accordance with the Process Note."

The Court also upheld the RP’s decision to exit the Consortium, emphasizing that the bid should have followed the prescribed increment rule, as reflected in the statement, "The consortium has given a bid in 1st round of Rs.240 Crores, hence, in the 2nd round they are obliged to give a bid of increment of multiple of Rs.10 Crores i.e. atleast Rs.250 Crores."

Regarding the negotiation process, the Court referred to Clause 2.3.11 of the RFRP, affirming that the Committee of Creditors (CoC) was fully competent to conduct negotiations for value maximization after the Challenge Process had concluded. The Court noted, "Challenge Process dated 27.10.2023 was conducted in accordance with the CIRP Regulations as well as the Process Note dated 12.10.2023," and reiterated, "The CoC was fully competent to conduct Negotiation Process for value maximization after completing the Challenge Process."

The Court also addressed the eligibility of the SRA to submit a Resolution Plan, which had been challenged by the Appellant. It observed that the Appellant’s objection could be raised at the stage of approving the Resolution Plan, stating, "The objection regarding eligibility of Resolution Applicant, thus, can very well be considered and examined by the Adjudicating Authority when the application to approve the Resolution Plan comes for consideration."

The Court examined the term "group" under Section 25(2)(h) of the Indian Bankruptcy Code (IBC), noting that it includes any entity directly or indirectly holding 26% or more of the share capital of the Prospective Resolution Applicant. The Court clarified that the term "entity" could be broadly interpreted to include individuals, as reflected in the guidelines by the Ministry of Information & Broadcasting (MIB): "The use of expression of ‘entity’ which has occurred in the MIB Guidelines... can also refer to an individual."

The Court affirmed that the Resolution Professional had properly verified the eligibility of the SRA, stating, "The Resolution Professional has verified the eligibility of SRA and found the SRA eligible." It also concluded that the SRA met both the net worth and turnover criteria as required by the Invitation for Expression of Interest (IEOI), noting, "Notably, even though the requirement as per the IEOI is to meet either the net worth or turnover criteria at group level, the SRA met both criteria."

The Court upheld the validity of the Challenge Process, confirmed the authority of the CoC in conducting negotiations, and affirmed the SRA's eligibility to submit a Resolution Plan. The Court concluded that there was no tenable ground under Section 61(3)(ii) of the IBC to interfere with the order approving the Resolution Plan.

Consequently, the Court dismissed all the Appeals, upholding the order dated 06.05.2024.

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