In a recent judgment of M.K. Rajagopalan vs. Dr. Periasamy Palani Gounder & Anr.¹, the Hon’ble Supreme Court of India has, inter-alia, issued a significant clarification regarding the eligibility of resolution applicants under the Insolvency and Bankruptcy Code, 2016 (“IBC”) as well as the commercial wisdom of the Committee of Creditors (“CoC”).

The case highlights the crucial role of following due process and establishing clear findings when evaluating the eligibility of resolution applicants. The Tourism Finance Corporation of India Limited filed a petition under Section 7² of the IBC, seeking the initiation of a Corporate Insolvency Resolution Process (“CIRP”) against Appu Hotels Limited (“Corporate Debtor”). As a result of this petition, the Corporate Debtor was admitted to CIRP on 05.05.2020 due to its failure to meet repayment obligations. MK Rajagopalan (“Resolution Applicant”) submitted a resolution plan, which obtained approval from the CoC (“Resolution Plan”). However, Dr. Periasamy Palani Gounder, the suspended promoter director of the Corporate Debtor, contested the approval, alleging procedural irregularities.

The Resolution Plan was subsequently rejected vide order dated 17.02.2022 passed by the National Company Law Appellate Tribunal, Chennai Bench (“NCLAT”) and the matter was referred back to the CoC for further consideration. The rejection was, inter-alia, based on the alleged disqualification of the Resolution Applicant under Section 164(2)(b)³ of the Companies Act, 2013 (“Companies Act”), and Section 88⁴ of the Indian Trusts Act, 1882 (“Trusts Act”). Aggrieved with it, MK Rajagopalan, the appellant herein, preferred an appeal against the order of the NCLAT in the Supreme Court.

The Hon’ble Supreme Court addressed several crucial issues in the present matter, including whether the approval of the Resolution Plan violated specific sections of the IBC and the Companies Act. The Apex Court further examined the concerns pertaining to the procedural irregularities, the eligibility of the Resolution Applicant, compliance with the Companies Act, and the non-discrimination of related parties.

In addressing a resolution applicant's eligibility under Section 29A(e)⁵ of the IBC, particularly with regards to their alleged disqualification as a director under Section 164(2)(b) of the Companies Act, the Hon’ble Supreme Court emphasized that an assumed disqualification cannot render an applicant ineligible. The Apex Court, additionally, clarified that the Registrar of Companies should evaluate the issue of disqualification, and only when a definitive order of disqualification is issued can it be presumed that a resolution applicant is disqualified from serving as a director and submitting a resolution plan. The Court emphasized that the concept of "deemed disqualification" does not exist under Section 164(2)(b) of the Companies Act and that the eligibility of a resolution applicant as a director is indicated by their Director Identification Number (DIN). Therefore, the NCLAT's declaration of disqualification was deemed unwarranted.

It was further stated that the Resolution Applicant was ineligible to submit a plan as an alter ego of the trust 'Sri Balaji Vidyapeeth,' which had already been declared ineligible. Additionally, the resolution applicant was barred from submitting a Resolution Plan by Section 88 of the Trusts Act.

The Supreme Court also expressed concerns about the conduct of the CIRP, as the revised Resolution Plan was directly filed before the NCLT without being presented to a vote before the CoC. Reiterating the principles laid down in Committee of Creditors of Essar Steels vs. Satish Kumar Gupta & Ors.⁶ and K Sashidhar vs. Indian Overseas Bank⁷, the Hon’ble Apex Court highlighted the significance of the commercial wisdom of CoC. Emphasizing the importance of thorough evaluation of a resolution plan by the CoC, it was stated that any alteration or amendment, regardless of its scale, must be presented to the CoC for scrutiny and approval through careful deliberation. Only after obtaining the CoC's approval can the modified plan be submitted to the NCLT for its approval.

This judgment provides significant clarity on various aspects of insolvency proceedings and the approval of resolution plans. It underscores the importance of adhering to the legal provisions of the IBC and the Companies Act, ensuring fair and proper resolution of corporate insolvency cases and reaffirms that an assumed disqualification is insufficient grounds for declaring an applicant ineligible.

By - Muskan Maheshwari