How Hindalco busted stage-managed insolvency resolution process of Hirakund Industrial Works

The National Company Law Appellate Tribunal (NCLAT) on the petition filed by Hindalco Industries busted a ‘stage-managed’ corporate insolvency resolution process (CIRP), where the corporate debtor, lenders as well as the successful resolution applicant were related parties, and yet they managed to get past the adjudicating authorities with the help of the Resolution Professional.

Case in brief

The case pertains to the CIRP of Hirakund Industrial Works Ltd (HIWL), which see a ‘successful’ closure with the approval of the resolution plan of the successful bidder Regus Impex by Cuttack Bench of NCLT on 22 December 2022.

Hirakund Industrial Works was owned by Infrastructure Development Company (IDCOL) of the Government of Odisha. The government of Odisha divested from the company and 100% of its shareholding was offered to three companies — Varsha Fabrics (P) Ltd., Mudrika Commercial Limited and India Finance Pvt. Thereafter, on the direction of High Court of Odisha, a tripartite agreement should be entered into between the HIW Workers’ Union, IDCOL and the three companies to ensure disbursement of pending dues to the workmen.

In 2007, HIWL shut its factory at Hirakud and in the same year, the three companies owning the HIWL transferred their entire shareholding to a company called Indo Wagon Limited, but the workmen’s dues still remained unpaid. Thereafter, the workers moved HC, which directed the labour commissioner to sell assets of the company to recover the workers dues. Later in 2016, on the order of Supreme Court, the Sambalpur labour Court determined the compensation payable at Rs 45.66 crore, and ordered HIWL to pay the workers dues within three months,

However, the three companies failed to make the necessary payment. Thereafter, the Odisha HC ordered reauctioning of assets of the company for payment of workers dues.  Hindalco Industries was the lone bidder in the auction.

Something’s fishy

However, just one day after the High Court of Odisha passed order on 8 April 2019, directing auction of the assets of the corporate debtor for discharging workers’ dues, financial creditor Nandakini Contractors insolvency application was taken up for hearing by the Cuttack bench of NCLT.

The financial creditor and corporate debtor made a joint request for urgent hearing of Section 7 application on 3 June 2019, and it was heard on 4 June 2019 leading to passing of the order admitting section 7 application and declaration of initiation of CIRP by financial creditor soon thereafter. Soon moratorium was imposed under the IBC regarding the assets of the corporate debtor and Anand Rao Korada was appointed as the Interim Resolution Professional, who was later retained as the Resolution professional.

Resolution professional’s act of omission

Once the moratorium was imposed, Hindalco Industries sought the copy of the detailed Expression of Interest (EoI). However, the resolution professional rejected the request of Hindalco Industries. And while Hidalco was seeking legal recourse against rejection by RP to share details of the EoI, the resolution professional filed application under section 31 of the IBC seeking approval of the resolution plan submitted by the successful resolution applicant Regus Impex, and such approval was granted by the Adjudicating Authority.

The Resolution professional could not even produce sufficient proof of a financial transaction between the financial creditor — Nandakini Contractors – and corporate debtor Hirakund Industrial Works.

That is the time when Hindalco gathered information about the members in the Committee of Creditors (CoC) and found that many of them were related party of the Corporate Debtor – Hirakund Industrial Works Ltd, and therefore were ineligible to be part of the CoC.

And while Hindalco and the workers union sought intervention from the NCLT, it heard the application for approval of the resolution plan submitted by Regus Impex, the successful resolution applicant, and approved it by order dated 22 December 2021.

Hindalco moved NCLAT and sought its intervention in the matter. It questioned the allegedly default payment by HIWL on the financial loan of Nandakini Contractors. It also questioned the legal sanctity of the process through which the CIRP was initiated. It also claimed that the financial creditors including the one which initiated the CIRP, and the successful resolution applicants are all linked to the corporate debtors and therefore, tried to establish that the whole CIRP process was stage-managed and fraudulently done.

The NCLAT concurred with all the allegations of Hindalco.

NCLAT’s observation

The appellate tribunal in its order said that it is convinced that the section 7 application was submitted by Nandakini Contractors fraudulently in collusion with the corporate debtor to seek an admission order for CIRP of the corporate debtor, and such an admission order was given by the Adjudicating Authority without proper and adequate scrutiny of the contents of the section 7 application and without examination of material therein.

It also accepted the fact that the companies belonging to the same group of companies were acting “in concert” to initiate and perpetrate the fraudulent CIRP.

It was convinced that senior counsels for Hindalco and HIW Workers’ Union have, on the basis of documents that are in public domain regarding shareholding pattern of the stakeholder companies, their registered addresses and email ids, explained the intricate web of inter-connections between Adishwar Nivesh Pvt. Ltd., the holding company of the corporate debtor, the members of the CoC and the Successful Resolution Applicant Regus Impex.

“These interconnections and cross-investments have not been disputed by either the corporate debtor or the SRA. It is quite clear that these companies are being guided by a ‘controlling mind’ and were acting in concert to defeat the objective and intent of the IBC,” the NCLAT said in its order.

The court further said in its order that “this glaring instance of ‘related parties’ of the corporate debtor becoming members of the CoC is sufficient to make the constitution of CoC illegal and render all the decisions and resolutions adopted in CoC meetings with participation and voting of the four companies referred above null and void in the eyes of law.”

On the issue of whether the Successful Resolution Applicant Regus Impex was disqualified to submit a resolution plan, the court noted that the Dahisar Traders and Luni Housing and Developers both are 50-50 % shareholders of the Successful Resolution Applicant. Now, Sheetal Exports has 31.63% shareholding in Dahisar Traders and Sheetal Exports also has a 15.8 % shareholding in Adishwar Nivesh, which holds 99.98 % shares in Indo Wagon, which is the holding company of the corporate debtor. Additionally, Divya Mercantile and Fragment Nivesh are holding 1.74% and 1.05% shares in the Dahisar Traders are also shareholders to the extent of 28.45% and 17.55% respectively in Adishwar Nivesh, thereby exhorting an influence which is an infringement of clauses (k) and (m) of section 5(24) of the IBC.

“The linkage between the corporate debtor Hirakud and Regus Impex is quite apparent, which has been brought out in the chart submitted by the Appellant HIL which is included in this judgment,” the court noted.

On the role of resolution professional Anand Rao Korada, the court said that the RP did not make any meaningful attempt to even enquire into allegations of fraud, collusion, involvement of related parties, and interrelationships between all entities involved in the CIRP.

It pointed out: “The first and foremost striking instance of the act of omission by the RP is displayed when the Adjudicating Authority vide order dated 28 February2020 directed the RP to produce before the Adjudicating Authority the financial debts and proof of such debts. We earlier noted that the RP failed to do so despite being reminded by the Adjudicating Authority. When we find that the purported debts and the proof of debts of the financial creditor included in the CoC are not established appropriately, the responsibility of the RP becomes very clear.”

The court also noted that RP Anand Rao Korada put his signature on an affidavit made in the name of director Sujit Dutta Roy regarding the Successful Resolution Applicant not being ‘related party’ and therefore, not ineligible under section 29-A of the IBC to submit a resolution plan.

NCLAT Order

The NCLAT set aside the admission order of NCLT which would lead to all the other actions including CIRP as non est and null and void, therefore, the CIRP against the corporate debtor will stand abated, and the corporate debtor will be freed from the rigours of CIRP including the effect of moratorium. The approval of resolution plan of Regus Impex was also quashed.

It also imposed a penalty of Rs 50 lakh each on Hirakund Industrial Works and financial creditor Nandakini Contractors.

The payment of Rs. 40 crore made by the Successful Resolution Applicant to the financial creditor in implementation of the successful resolution plan, has been asked to be deposited back with the Successful Resolution Applicant Regus Impex within one month of the date of this order.

The tribunal has also ordered investigation by the Insolvency and Bankruptcy Board of India (IBBI) on the conduct of resolution professional Anand Rao Korada. The inquiry has been asked to be completed within three months.

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