NCLT RejectsRareARC 's Resolution Plan for Rajesh Business and Leisure Hotels, Cites Procedural Irregularities

Background

The National Company Law Tribunal (NCLT) has rejected the resolution plan submitted by Rare Asset Reconstruction Limited ( Rare ARC) in consortium with Check-Inn Hotels Pvt. Ltd. for the revival of Rajesh Business and Leisure Hotels Private Limited, a corporate debtor undergoing corporate insolvency resolution process (CIRP).

Arguments

The key arguments presented in the case were:

Objectors (Unsuccessful Resolution Applicant and Ex-Promoters/Directors)

• The inclusion of Check-Inn Hotels Pvt. Ltd. as a consortium partner at the last minute was in violation of the CIRP Regulations, as its name did not appear in the final list of prospective resolution applicants.
• Rare ARC, being an asset reconstruction company (ARC), was not eligible to submit a resolution plan as it did not meet the minimum net-owned funds requirement of ₹1,000 crore set by the Reserve Bank of India.
• The resolution plan was not provided to the erstwhile directors of the corporate debtor in a timely manner, which was a material irregularity in the CIRP process.

Resolution Professional (RP) and Committee of Creditors (CoC)

• The CoC had the discretion to permit changes in the composition of the consortium under the Request for Resolution Plan (RFRP).
• The provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) would prevail over the SARFAESI Act, and therefore, the eligibility requirements for ARCs under the SARFAESI Act would not apply.
• The commercial wisdom of the CoC in approving the resolution plan should not be interfered with.

Court's Analysis and Reasoning

The NCLT observed that the inclusion of Check-Inn Hotels Pvt. Ltd. as a consortium partner at the last minute was in violation of the CIRP Regulations, which prescribe a detailed procedure for the preparation of the final list of prospective resolution applicants. The NCLT held that the CoC could not have exercised its discretion to permit the change in the composition of the consortium after the submission of the resolution plan.

The NCLT also found that the failure to provide the resolution plan to the erstwhile directors before the CoC meeting held on February 22, 2023 was a material irregularity in the CIRP process, as the members of the erstwhile board of directors are vitally interested in the resolution plan.

However, the NCLT held that the eligibility of Rare ARC as a resolution applicant under the SARFAESI Act would not be a ground for rejecting the resolution plan, as the provisions of the IBC would prevail over the SARFAESI Act.

Decision

The NCLT rejected the resolution plan submitted by Rare ARC and Check-Inn Hotels Pvt. Ltd. and granted liberty to the RP and CoC to re-run the CIRP process strictly in accordance with the IBC and the CIRP Regulations. The NCLT also deemed an extension of the CIRP period by 4 months for this purpose.

The NCLT's decision highlights the importance of strict adherence to the procedural requirements under the IBC and the CIRP Regulations, even in the exercise of the commercial wisdom of the CoC. The judgment serves as a reminder that the NCLT will not hesitate to intervene if there are material irregularities in the CIRP process that undermine the principles of transparency and fairness.