Ricoh India Insolvency: Creditors’ Committee Cannot Approve Illegal Conduct, NCLAT Says

The National Company Law Appellate Tribunal has set aside an order which approved a resolution plan for Ricoh India Ltd. that was submitted by a consortium led by Kalpraj Dharamshi and Rekha Jhunjhunwala.

Kotak Investor Advisors Ltd., the unsuccessful resolution applicant, had challenged an order passed by the Mumbai bench of the NCLT in November on the ground that Ricoh India’s resolution professional accepted the plan after expiry of the deadline for submitting expression of interest.

A three-member bench of the appellate tribunal observed in its order that Ricoh India’s resolution professional committed a “grave error” in accepting the resolution plan beyond the last date without notifying an extension in the deadline.

Ricoh India, which owes nearly Rs 2,519 crore to its financial and operational creditors, had filed a voluntary insolvency application in January 2018. Grappling with problems due to fraud and mismanagement, the imaging and printing company’s troubles mounted in September 2015, when its newly appointed audito—BSR & Co.—flagged financial discrepancies.

The NCLAT has directed Ricoh India’s creditors’ committee to take a fresh decision on the resolution plan within 10 days and communicate it to the dedicated insolvency tribunal. It has also noted that the NCLT should pass a liquidation order if the time limit for completing the insolvency process expires and no decision is communicated to it.

Creditors’ Committee Can’t Approve Illegal Conduct, NCLAT Says

Ricoh India’s committee of creditors had invited expression of interest from prospective resolution applicants in July 2018, with a submission deadline by August. After that, it issued a “process memorandum” requiring applicants to submit a resolution plan before Jan. 10, 2019.

While Phoenix ARC, an affiliate of Kotak Advisors, submitted a plan before the deadline, it alleged that Ricoh India’s resolution professional allowed the Kalparaj Dharamshi-led consortium to submit its plan on Jan. 28, which was after the submission of bids by other applicants and beyond the prescribed deadline.

Ramji Srinivasan, senior counsel for Kotak Investors, argued that:

• A single-member bench of the NCLT had heard the arguments and reserved its order on the resolution plan in July last year.
• While its application challenging the committee of creditors’ approval was only heard by a judicial member, a reconstituted two-person bench, which also included a technical member, passed the order rejecting its objections. This violated the principles of natural justice.
• The consortium was allowed access to Ricoh India’s data room by the resolution professional beyond the cut-off date without obtaining the committee of creditors’ approval.
• NCLT had approved a resolution plan submitted by Ricoh India’s minority shareholders which provides for significant payouts to them, resulting in a conflict of interest.
• And lastly, the resolution professional committed various irregularities during the insolvency process.

Counsels representing the consortium, committee of creditors and resolution professional questioned the appeal’s maintainability on the ground that it was filed beyond the limitation period. The committee of creditors accepted the consortium’s resolution plan with an intent of value maximisation. And lastly, the process memorandum allowed the committee of creditors to accept a plan as per its commercial wisdom during any stage of the resolution process.

The appellate tribunal rejected these arguments and made the following findings:

• While the committee of creditors can exercise its commercial wisdom in accepting or rejecting resolution plans, it cannot approve an illegal or arbitrary conduct during the insolvency resolution process, as done in the present case.
• An ‘illegal’ exercise of power by the resolution professional in conducting the corporate insolvency resolution process cannot be considered as an exercise for maximising value under commercial wisdom.
• The resolution professional failed to properly justify its reasons for not issuing notices as per procedure.
• And so, the resolution professional committed a grave error in accepting the consortium’s resolution plan after the expiry of the submission deadline.

The appellate tribunal also noted that the NCLT failed to consider the irregularities pointed out by Kotak Investors.