Costs would be CIRP costs if they are directly related to the Corporate Insolvency Resolution Process and also approved by the Committee of Creditors (CoC). And in this case CoC had not approved for it to the treated as CIRP costs.
RP/CoC in their 5th and the 10th meeting had decided that payments to vendors engaged in specific projects would be sourced from the cash flow generated by those projects’ customers.
The Darlipali Plant of the Corporate Debtor ceased operations during the CIRP Period. Consequently, the activities undertaken by Respondent No. 1, acting as a subcontractor, did not contribute to the Corporate Debtor’s viability as a “going concern.”
We are in agreement with the legal opinion quoted in the minutes that Corporate Debtor as a whole needs to be considered as going concern and not parts of the Corporate Debtor.
The amount due on account of supply of goods made by the creditor to the Corporate Debtor company during CIRP, in compliance of the order given by the Resolution Professional to keep the Corporate Debtor company as a going concern shall form part of the CIRP costs as defined u/s 5(13) of the Code,
Question of cost and its approval lays in the domain of the CoC. The CoC may ratify, modify or set aside the cost claimed. These issued may be decided in the meeting of the CoC and are not to be examined by the Adjudicating Authority even before the CoC takes a decision.
Excerpts of the order;
The Appellant is the Liquidator of the Corporate Debtor i.e., Sunil Hitech Engineering Ltd. (SHEL) and the present appeal under Section 61 of the Code is against the Impugned Order dated 21st November 2023 passed in IA/535(MB)/2022 in CP (IB) 2295/NCLT/MB/2018, by the Adjudicating Authority, Mumbai Bench, allowing the claims during the CIRP to be treated as CIRP costs.
Brief Background of the case:
# 2. On November 18, 2014, National Thermal Power Corporation Limited (NTPC) issued a Letter of Award to the Corporate Debtor (SHEL) to construct CW Systems and MUW Systems Civil Works for the Darlipali Super Thermal Power Project, Odisha. On February 27, 2018, the Corporate Debtor (SHEL) entered into a sub-contract with Respondent No. 1/ M/s RBM Enterprises, appointing it to fabricate and erect CW ducts at the NTPC project site at Darlipali, Odisha. The work order was issued in favor of Respondent No. 1 and was a sub-contract under the main contract executed between the Corporate Debtor and National Thermal Power Corporation Limited (“NTPC”) on back-to-back basis. In September 2018, the Adjudicating Authority initiated the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor and appointed Mr. Harshad Deshpande as the Interim Resolution Professional (IRP). Following this, a public announcement was made inviting claims from creditors. Subsequently, Mr. Ashish Rathi was appointed as the Resolution Professional (RP), and later on an Interlocutory Application for liquidation of the Corporate Debtor was filed and admitted in June 2019.
# 3. As per the Liquidation Order, Mr. Avil Menezes, the Appellant, was appointed as the liquidator. Upon his appointment, the Appellant invited claims from creditors, and Respondent No. 1 submitted a claim for an amount of INR 1,36,41,854/-, relating to fabrication and erection works at the Darlipali project site. The Appellant, after a meeting with Respondent No. 1 and other secured creditors, determined that the claimed amount did not qualify as CIRP cost. Respondent No. 2, the former Resolution Professional, also confirmed this stance during the meeting, stating that only running costs during the CIRP period were considered as CIRP costs. Respondent No. 1 disputed this decision and demanded immediate payment, claiming that its dues were indeed CIRP costs. The Appellant responded, reiterating that the claim did not meet the criteria for CIRP costs and would be processed under Section 53 of the Insolvency and Bankruptcy Code (IBC).
# 4. Thereafter, Respondent No. 1/subcontractor then filed an Interlocutory Application No. 162 of 2021 seeking direction for its claim to be treated as CIRP cost. Following the Adjudicating Authority’s direction to process the claim on merits, the Appellant reviewed the claim but maintained that it did not qualify as CIRP cost, citing the decision of the Committee of Creditors (CoC) and relevant provisions of the IBC and regulations.
# 5. Respondent No. 1, dissatisfied with this decision, filed another Interlocutory Application No. 535 of 2022 before the Adjudicating Authority, seeking classification of its claim as CIRP cost. The Appellant- Liquidator contested this, arguing that the claim did not meet the requirements outlined in the IBC, Regulations, and CoC decisions. The Adjudicating Authority, however, directed the Appellant to admit the dues of Respondent No. 1/subcontractor as CIRP cost, prompting the Appellant to file the present appeal.
# 6. The Appellant has urged this Tribunal to overturn the Adjudicating Authority’s order and classify the claimed amount as non-CIRP cost, aligning with CoC decisions, regulatory provisions, and contractual terms.
# 7. Heard the counsels of both sides and also perused the records.
Appraisal:
# 34. The issue before us is whether the costs incurred for the work done during the CIRP by Respondent No 1/subcontractor, can be considered as CIRP Cost or not by the Liquidator.
# 35. The Corporate Debtor had over 25 projects spread across India. When the Corporate Debtor entered into CIRP, only 7-8 projects were ongoing, and rest all were stalled due to various reasons. The issue surrounding the inclusion of vendor payments in CIRP Costs underwent thorough deliberation during the 5th and 10th Committee of Creditors (CoC) meetings convened on 11th January 2019 and 3rd June 2019, respectively. To maintain the company as a going concern, a decision was taken by the CoC/RP to run these projects on the basis of the cash generation from the respective projects and deploy the funds in the same project from where it was received.
# 36. The relevant extract of the Minutes of 5th CoC meeting of 11th January 2019 are as under:
“The RP then informed the members that a common issue which is being faced at all the sites is that the customers are concerned that whether money paid for the project will be deployed back in the project or not. The RP also added that letters have been written to all the customers stating that best efforts would be put in by RP and his team to provide all the assistance and deploy back the funds at the earliest convenience depending on the availability of funds.
The CoC members stated that the Company officials and the RP should ensure certain cut back to meet other costs of the Corporate Debtor and to take care of the CIRP costs”
# 37. Further, the CIRP expenses were also discussed in the 10th CoC meeting held on June 03, 2019 and the relevant extract of minutes are as under:
“Agenda Item No. 4 – To take note of the Corporate Insolvency Resolution Process (“CIRP”) expenses.
The RP then presented the CIRP costs till date to the members and stated these are approximate numbers, and that the costs required to be incurred till final orders are passed u/s 31 or u/s 33 would also be CIRP cost. The RP also added that costs relating to sites which are inactive or have been terminated earlier/during the CIRP may not form a part of CIRP cost, as the CoC had authorized payments for the sites out of the cash flows being received from such sites, and as per the Code, the test was whether the costs are required to be incurred for the organization to function as a going concern. The RP then also presented the breakup of amounts. The members noted the same.”
# 38. From the extracts of the minutes of the CoC, it is clear that a conscious decision was taken that payments to vendors engaged in specific projects would be sourced from the cash flow generated by those projects’ customers. The Darlipali Plant of the Corporate Debtor ceased operations during the CIRP Period. Consequently, the activities undertaken by Respondent No. 1, acting as a subcontractor, did not contribute to the Corporate Debtor’s viability as a “going concern.” This pivotal factor led Respondent No. 2, in its capacity as the Resolution Professional, to exclude the costs incurred by Respondent No.1 from the ambit of CIRP Costs.
# 39. Apart from the CoC proceedings, we may also look into the specific provisions under the Code which help to decide, whether it is within the commercial wisdom of the COC/RP to exclude a cost as CIRP cost or not. Section 5(13) of the Insolvency and Bankruptcy Code, 2016 defines CIRP costs as those which are incurred by the Resolution Professional in running the business of the Corporate Debtor as a going concern and is extracted as follows:
“(13) insolvency resolution process costs means–
(a) the amount of any interim finance and the costs incurred in raising such finance;
(b) the fees payable to any person acting as a resolution professional;
(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern;
(d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and
(e) any other costs as may be specified by the Board;..”
# 40. And the relevant Regulation governing CIRP costs is the Regulation 31 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which is extracted as follows:
“Regulation 31: Insolvency resolution process costs.
31. “Insolvency resolution process costs” under Section 5(13)(e) shall mean-
(a) amounts due to suppliers of essential goods and services under Regulation 32;
2[(aa) fee payable to authorised representative under 3[sub-regulation (8)] of regulation 16A;
(ab) out of pocket expenses of authorised representative for discharge of his functions under 4[section 25A];]
(b) amounts due to a person whose rights are prejudicially affected on account of the moratorium imposed under section 14(1)(d);
(ba) fee payable to the Board under regulation 31A;]
(c) expenses incurred on or by the interim resolution professional to the extent ratified under Regulation 33;
(d) expenses incurred on or by the resolution professional fixed under Regulation 34; and
(e) other costs directly relating to the corporate insolvency resolution process and approved by the committee.” [Emphasis Supplied]
It would be apparent from the highlighted portion of the Regulation that costs would be CIRP costs if they are directly related to the Corporate Insolvency Resolution Process and also approved by the Committee of Creditors (CoC). And in this case CoC had not approved for it to the treated as CIRP costs.
# 41. Another dimension which is peculiar to the facts of the case, is the contractual condition, specifically clause 5 which relates to back-to-back contract. The RP had classified the projects into different categories as follows and was treating them differently for CIRP costs-
1) Active Projects – where work is still going on, or the project is near completion date or certain payments are due.
2) Stalled during the CIRP period -Projects where work was stalled during the CIRP process was going on.
3) Inactive Projects- Projects which were stalled before commencement of CIRP process. project subcontracted at a percentage of the revenue from that project.
4) Back-to-back contracts- Entire project subcontracted at a percentage of the revenue from the project.
The contract in present case was a back-to back contract and is apparent from the material on record. The copy of the introductory part of the work order dated 27.02.2018, which clearly mentions it as on “back-to-back basis”, the relevant portion is extracted below:
“Ref. No. SHEL/NGP/DSTPP/2017-18/1539-A
Date: 27.02.2018
To,
M/s. RBM Enterprises
At-Islampur, PO-Tulati
PS-Korai, Distt. Jalpur
Odisha-755022
Sub: Work Order for execution of Fabrication & Erection Works of CW system on Back to Back basis At NTPC DARLIPALI 2X800 STPP, ST-I, Odisha, Reg.
Ref. 1. Discussions and negotiations through mail on 21.02.2018
2. Your final order dated 23.02.2018”
This work order also has payment mechanism in clause 5 which clearly mentions that it is a back to back contract, which is extracted as follows:
“5. COMMERCIAL CONDITIONS: –
1) Contract Value of M/s RBM Enterprises is Rs. 2,73,20,814.00 (Rupees Two crore seventy three lakhs twenty thousand eight hundred & fourteen only) as per Annexure-A. However, the payment shall be done as per the actual works executed at site.
2) During the currency of contract and extensions thereof, prices are firm and no escalation is admissible.
3) All the due certified payments from SHEL will be credited to M/s RBM Enterprises within 07 working day on receipt of payment from NTPC.
4) 95% of bill amount shall be released as per rates specified in BOQ. Contractor shall submit RA bill once in month till 25th of each month for actual quantities of completed work during the month.
5) Balance 5% shall be treated as retention and released along with final bill.
6) All the contractual deductions made by NTPC shall be deducted from RA Bills of M/s RBM Enterprises.
7) Any other deductions not specifically mentioned herewith on account of any reason attributable to M/s RBM Enterprises will be deducted from his account.”
[Emphasis supplied]
# 42. RP/CoC in their 5th and the 10th meeting had decided that payments to vendors engaged in specific projects would be sourced from the cash flow generated by those projects’ customers. The Darlipali Plant of the Corporate Debtor ceased operations during the CIRP Period. Consequently, the activities undertaken by Respondent No. 1, acting as a subcontractor, did not contribute to the Corporate Debtor’s viability as a “going concern.” Given that the Corporate Debtor was functioning as a contractor, its ability to fulfil financial obligations hinges upon the receipt of payments from NTPC. This dependency is also underscored by Clause 5 of the commercial terms outlined in the back-to-back contract executed on 17th February 2018 with Respondent No. 1, stipulating that payments to Respondent No. 1 are contingent upon NTPC’s disbursement. Consequently, both within and outside the purview of the Corporate Insolvency Resolution Process (CIRP), the Corporate Debtor remains bound by the contractual obligation to remunerate Respondent No. 1 solely upon the receipt of funds from NTPC. Until such time, the obligation to compensate Respondent No. 1 does not crystallize, emphasizing that the costs incurred in relation to Respondent No.1 cannot be construed as necessary for preserving the Corporate Debtor’s status as a going concern. In essence, the Corporate Debtor’s financial health and ability to honor its commitments are intricately linked to the timely receipt of payments from NTPC. Therefore, any expenses related to Respondent No. 1 cannot be deemed essential for maintaining the Corporate Debtor’s status as a going concern until the requisite payments are realized from NTPC.
# 43. Now we see as to how the Adjudicating Authority has arrived at the conclusion of treating this as CIRP costs. The relevant portion paragraph 4.3, which needs our consideration, is extracted as below:
“4.3. From the perusal of these minutes, we find that the Liquidator rejected the claim of the Applicant to be considered as CIRP cost on sole ground that the Resolution Professional has not considered the same to be so. There appears to be no dispute that these costs came to be incurred during the CIRP process for completion of unfinished work at the behest of the Resolution Professional, accordingly merely because this contract stood completed during the CIRP period cannot take it away from the scope of CIRP costs on the ground that the completed projects do not contribute to the going concern status of the Corporate Debtor. On the contrary, we are in agreement with the legal opinion quoted in the minutes that Corporate Debtor as a whole needs to be considered as going concern and not parts of the Corporate Debtor. Accordingly, applying this principle to the present facts of the case, and the decision passed by this Bench in the case of Southern Engineers Vs Innoventive Industries Limited (MA 441/2018 in CP (IB)- 01(MB)/2016) holding that the amount due on account of supply of goods made by the creditor to the Corporate Debtor company during CIRP, in compliance of the order given by the Resolution Professional to keep the Corporate Debtor company as a going concern shall form part of the CIRP costs as defined u/s 5(13) of the Code, we do not hesitate to hold that the charges attributable to work carried out by the Applicant during the CIRP period shall form part of the CIRP costs, irrespective of the fact that such contract, in relation to which work was carried out, were completed during the CIRP period. Accordingly, we direct the Liquidator to ascertain these facts and admit the claim of the Applicant after applying the aforesaid principle.” [emphasis supplied]
44. Adjudicating Authority has returned a finding that the Corporate Debtor as a whole need to be considered as going concern and not parts of the Corporate Debtor. Applying this in present case, all the costs pertaining to all the sites will have to be taken as CIRP costs, which may lead to an absurd situation that the vendors of these sites would get priority over the payments in waterfall mechanism under section 53 of the Code, even in a situation when there are no cash inflows from that particular project, and that might encroach upon the rights of the other stakeholders who would otherwise have priority in the waterfall mechanism.
# 45. Such a finding also goes against the existing legal provisions and precedents and the facts of the case as noted in the subsequent paragraphs.
# 46. Moreover, such decisions need the approval of the CoC as is clear from the Section 5(13) of the Insolvency and Bankruptcy Code, 2016 and also Regulation 31 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 which says that “Insolvency resolution process costs” under Section 5(13)(e) shall mean “.. other costs directly relating to the corporate insolvency resolution process and approved by the committee.”
# 47. The Appellant has tried to rely on other similarly situated claims for payment as CIRP cost in which the Adjudicating Authority vide order dated 21.01.2022 in IA 1810, 1812, 2583 and 25987 has taken opposite view and has held that
Even though the facts may be slightly different but Adjudicating Authority has considered that the dues can only be classified as CIRP costs if the CoC confirms them during the CIRP period. We may not rely upon this case but this shows the primacy of CoC in determination of CIRP costs.
# 48. Appellant has also pointed out the guidance for insolvency professionals (IP) in clause 8(a) and other sections in the Circular No. IBBI/IP013/2018 dated 12.06.2018. It directs IPs to ensure that the fee or other expenses incurred by them are directly related to and necessary for the CIRP and also approval of the Committee of Creditors (CoC) for the fee or other expense is obtained, wherever approval is required. It is also clarified that the IRPC shall not include any fee or other expense not directly related to CIRP.
The relevant provisions are extracted herein:
“..6. Keeping the above in view, the IP is directed to ensure that:-
(a) the fee payable to him, fee payable to an Insolvency Professional Entity, and fee payable to Registered Valuers and other Professionals, and other expenses incurred by him during the CIRP are reasonable;
(b) the fee or other expenses incurred by him are directly related to and necessary for the CIRP;
(c) the fee or other expenses are determined by him on an arms’ length basis, in consonance with the requirements of integrity and independence;
(d) written contemporaneous records for incurring or agreeing to incur any fee or other expense are maintained;
(e) supporting records of fee and other expenses incurred are maintained at least for three years from the completion of the CIRP;
(f) approval of the Committee of Creditors (CoC) for the fee or other expense is obtained, wherever approval is required; and
(g) all CIRP related fee and other expenses are paid through banking channel.
7. The Code read with regulations made thereunder specify what is included in the insolvency resolution process cost (IRPC). The IP is directed to ensure that:-
(a) no fee or expense other than what is permitted under the Code read with regulations made thereunder is included in the IRPC;
(b) no fee or expense other than the IRPC incurred by the IP is borne by the corporate debtor; and
(c) only the IRPC, to the extent not paid during the CIRP from the internal sources of the Corporate Debtor, shall be met in the manner provided in section 30 or section 53, as the case may be.
8. It is clarified that the IRPC shall not include:
(a) any fee or other expense not directly related to CIRP;
(b) any fee or other expense beyond the amount approved by CoC, where such approval is required;
(c) any fee or other expense incurred before the commencement of CIRP or to be incurred after the completion of the CIRP;
(d) any expense incurred by a creditor, claimant, resolution applicant, promoter or member of the Board of Directors of the corporate debtor in relation to the CIRP;
(e) any penalty imposed on the corporate debtor for non-compliance with applicable laws during the CIRP; [Reference: Section 17 (2) (e) of the Code read with circular No. IP/002/2018 dated 3rd January, 2018.]
(f) any expense incurred by a member of CoC or a professional engaged by the CoC;
(g) any expense incurred on travel and stay of a member of CoC; and
(h) any expense incurred by the CoC directly;
[Explanation: Legal opinion is required on a matter. If that matter is relevant for the CIRP, the IP shall obtain it. If the CoC requires a legal opinion in addition to or in lieu of the opinion obtained or being obtained by the IP, the expense of such opinion shall not be included in IRPC.]
(i) any expense beyond the amount approved by the CoC, wherever such approval is required; and
(j) any expense not related to CIRP…”
Based on the above guidance of IBBI we cannot find fault in the course of action followed by both Resolution Professional and the liquidator while dealing with the claims of the sub- contractor in this particular case.
# 49. We are, therefore, inclined to agree that mere fact that the dues have arisen during the CIRP period would not be determinative of it to be classified as CIRP cost. Interpreting Section 5(13)(c) of the Code in this manner would render the words “in running the business of the corporate debtor as a going concern” otiose. Further, it is clear from Regulation 31 and the guidance provided by IBBI vide the above-mentioned circular that unless the CoC has approved the dues and they directly relate to the CIRP, the dues cannot be classified as CIRP cost. And the CoC decided to exclude the cost incurred from the terminated projects, which is not maintaining the Corporate Debtor as “a going concern”.
# 50. In conclusion, the following criteria determine whether a cost incurred by the Resolution Professional during CIRP qualifies as CIRP cost: (a) maintaining the Corporate Debtor as a going concern, (b) payment to suppliers of essential goods and services, and (c) direct relation to CIRP with approval from the Committee of Creditors (CoC). Applying these criteria to this case, the claim fails to meet the definition of CIRP cost.
# 51. This has also been held so in various decisions of this Tribunal also. In Bharat Hotels Ltd. v Tapan Chakraborty Company Appeal (AT) (Insolvency) No. 1074 of 2022 it was held that:
“5. In the present case, the CIRP had commenced on 19.12.2019 and after more than two years, resolution was passed on 28.06.2022 for liquidation. The Application which was filed by the Appellant on the very next day of passing of the resolution was indirectly for challenging the liquidation. The Appellant who is a minority shareholder in the CoC cannot resist the passing of the resolution. The Adjudicating Authority has rightly rejected the application filed under Section 18 of Code and Regulation 34A, which was not to be entertained. The Appellant asked Resolution Professional to disclose item wise insolvency resolution process costs in such manner as required by the Board (IBBI). Question of cost and its approval lays in the domain of the CoC. The CoC may ratify, modify or set aside the cost claimed. These issued may be decided in the meeting of the CoC and are not to be examined by the Adjudicating Authority even before the CoC takes a decision. It shall be always open for the appellant to raise issue regarding the cost in the meeting of the Committee of Creditors. With reference to the grievance of the Appellant with regard to obtaining valuation report, it is always open to the Appellant to request the Liquidator to obtain a valuation report, if not already obtained. With these observations, the Appeal is dismissed.”
# 52. This position was also restated in Mehul Parekh and Ors. v. Unimark Remedies and Ors. Company Appeal (AT) (Ins) No. 839 of 2023 where it has been noted that “…The direction to CoC to redetermine the CIRP cost after approval of the Resolution Plan by the CoC is unsustainable…” It is clear from these Judgements that the Adjudicating Authority erred by entering the field of the CoC’s commercial decision.
# 53. Based on the arguments presented, the Liquidator has a strong case for successfully appealing the Adjudicating Authority’s (AA) decision for the following reasons:
The Respondent’s claim lacks the crucial approvals from both the Resolution Professional (RP) / Committee of Creditors (CoC), a clear requirement for CIRP cost classification.
The work performed by Respondent No. 1 on the terminated Darlipali project did not contribute to maintaining the Debtor as a “going concern,” another essential element of CIRP costs.
The contract between the Debtor and Respondent No. 1 being back to back basis was tied to receiving funds from NTPC, which didn’t happen. The Liquidator couldn’t have incurred this cost without NTPC’s fulfilment.
The AA’s decision contradicts established precedents from both this Tribunal (“Bharat Hotels” and “Mehul Parekh” cases) and rulings on similar claims within this Debtor’s CIRP process.
# 54. Therefore, the Respondent’s claim should be classified as non-CIRP cost, falling under Section 53 of the Code for distribution during liquidation.
Conclusion
The Respondent’s claim doesn’t meet the CIRP cost definition. It lacks CoC approval, doesn’t support the “going concern” objective, and is subject to unrealized payments from NTPC. The AA’s decision contradicts CoC’s authority, previous rulings, and commercial realities and is therefore set aside. Accordingly, the Respondent’s claim should not be treated as CIRP cost. No orders as to costs.
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