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In the high-stakes theater of evolving insolvency law, the line between commercial prudence and judicial oversight remains fiercely contested. The very survival of a stressed corporate entity under the IBC1 is vested in preserving the corporate debtor as a going concern and maximizing the value of its assets. One of such issues is the permissible extent of the AA2‘s intervention regarding a CoC3 approved sale of the Corporate Debtor’s encumbered, non-core assets to the SRAs4 of its sister concern companies, as opposed to inviting fresh bids from PRAs5.
This pivotal legal focus, particularly concerning the disposal of non-core assets in the insolvency resolution, was meticulously examined by the NCLAT6, Principal Bench, New Delhi in the composite judgment of Pankaj Mahajan v. Edelweiss Asset Reconstruction Asset Company & Ors7 and connected appeals. The Appellate Tribunal, comprising Arun Baroka, Member (Technical), primarily held that the commercial wisdom of the CoC in deciding to sell non-core, encumbered assets under Regulation 29 of the CIRP8 Regulations9, even outside a standard auction, should not be lightly interfered with by the AA, provided it aims for value maximization and adheres to due process.
The factual matrix involves three sister companies, all undergoing separate CIRPs. The Corporate Debtor, one of the sister companies, owned specific non-core land parcels in a particular area, which were encumbered with certain CoC members. These parcels, critically situated in and around the operational sites of the two other sister concerns, were deemed best utilized by the SRAs of these two to maximize value for all three CIRPs. Consequently, Corporate Debtor’s CoC, in the exercise of its commercial wisdom, approved the sale of these specific non-core, encumbered land parcels to the SRAs of the sister companies, and RP10 filed an application before the NCLT11/AA, Mumbai Bench, seeking necessary permission under Regulation 29 of CIRP Regulations, 2016.
Arguments and Appellate Analysis: Upholding CoC’s Prudence
The Appellant (RP), supported by the CoC of Corporate Debtor, contended that the proposed sale of non-core assets was a valid exercise of the CoC’s commercial wisdom, permissible under the enabling provisions of Regulation 29 of the CIRP Regulations for value maximization, provided requisite approvals from the secured creditors (mortgage holders) and the AA were obtained. They argued that the non-contiguous, uniquely located land could only be optimally valued and utilized by the SRA of the sister concerns, and forcing an open auction would delay the entire resolution process and undermine the commercial decision. The Respondent, however, contended that the proposed sale violated the spirit of the IBC, did not lead to value maximization, and that PRAs were kept in the dark about the land’s availability. The intervenor essentially argued that assets should be sold through an open auction, preferably governed by the norms under the Liquidation Regulations, and that the AA’s direction to invite bids from PRAs was appropriate.
In resolving the conflict, the NCLAT delved into the established legal principles governing CIRP. The Appellant heavily relied on the Appellate Tribunal’s ruling in Jet Aircraft Maintenance Engineers Welfare Association Vs. Shri Ashish Chhawchharia RP for Jet Airways (India) Ltd12., which clearly established that a RP, with the necessary CoC and AA approvals, is empowered to sell even encumbered non-core assets of the Corporate Debtor if deemed necessary for better value realization, as there is no absolute bar under the Code. The Tribunal considered the misplaced reliance on Regulation 33 of the Liquidation Regulation13, noting that this pertains to liquidation, not CIRP, and the phrase ‘shall ordinarily sell… through an auction’ is merely directory, not mandatory. Furthermore, the argument regarding the retrospective application of Regulation 36A(1A), which was inserted after the CoC’s decision, was deemed irrelevant, as the decision was taken under the law prevailing at the time, i.e., Regulation 29.
After carefully hearing both contentions and analyzing the legal precedents, the NCLAT removed the dichotomy. The AA had partly allowed the application by permitting the sale but erroneously directed that the land be offered to the PRAs of the sister entities, effectively “reversing the timeline” of the advanced CIRPs of those companies. The NCLAT concluded that the CoC, having deliberated at length on the unique location and utility of the land (non-contiguous, scattered, and crucial for the sister concerns’ operations), exercised its commercial wisdom in proposing the sale to the already identified SRAs of the sister concerns as the best route to maximize value for all three entities.
The Appellate Tribunal found no allegation of mala fides, undervaluation, or lack of transparency that would warrant interference with the CoC’s decision. Thus, the NCLAT set aside the part of the Impugned Order that imposed the condition of inviting fresh bids from PRAs, thereby upholding the CoC’s decision to sell the non-core assets to the SRAs, subject to the other approvals.
Conclusion
The case of Pankaj Mahajan (Supra) and connected appeals has decisively clarified the scope of a CoC’s authority under Regulation 29 of the CIRP Regulations. The judgment reaffirms the primacy of the CoC’s commercial wisdom in matters concerning the sale of non-core, encumbered assets when the decision is transparent, well-reasoned, and singularly focused on value maximization for the corporate debtor, especially in complex, multi-entity insolvency scenarios. The Appellate Tribunal emphasized that the Adjudicating Authority’s intervention power is limited to checking for procedural irregularities or egregious violations of law, and it cannot substitute its own business judgment for that of the CoC.
This ruling has significant aftermath, particularly for group insolvency situations or cases involving financially interconnected entities. It establishes a strong precedent that allows CoCs of related Corporate Debtors to collaborate and structure transactions that optimize the value of their collective assets, even if it involves the targeted sale of an asset from one entity to the SRA of another. This flexible approach to asset disposal is crucial for holistic and efficient resolution. It will likely reduce frivolous interventions by parties lacking locus standi aimed at derailing the CIRP, as the Tribunal will place greater weight on the reasoned decision of the creditor body.
Despite the clarity, the judgment leaves certain practical questions like should specific guidelines be formulated for the valuation of non-core assets in related party or SRA-specific sales to ensure the CoC’s valuation is demonstrably maximized? How can the CIRP Regulations further strengthen the requirement for transparent communication to all PRAs regarding the exclusion and separate sale of specific assets before they submit their plans, mitigating future claims of being “kept in the dark”? Could the CoC minutes require a more detailed, quantified cost-benefit analysis comparing the proposed Regulation 29 sale versus a hypothetical open auction for uniquely located assets to better justify the commercial wisdom to the AA?
Citations
Expositor(s): Adv. Shreya Mishra
